MINUTES OF EVIDENCE: The Investigation of Alleged Irregularities at Halton College

26/04/1999, HC 413-i

MR MICHAEL BICHARD, PROFESSOR DAVID MELVILLE, MR JOHN BOLTON AND MR DAVID TAYLORSON
 

  1. This afternoon the Committee is taking evidence on the Comptroller and Auditor General's report on the investigation of alleged irregularities at Halton College. Welcome once again Mr Bichard and Professor Melville and for the first time to Mr John Bolton and Mr David Taylorson. Welcome to all of you. I shall start with paragraphs 3.2 to 3.10. I note from those that Halton College is likely to have to repay some £6.4 million. How was the college able to overclaim such large sums without detection?

  (Professor Melville) This is detailed in the report and it is very largely made up from matters which were raised as a result of the investigation first of all of matters we were already considering in terms of clawback of funding for Halton. Then, over a number of years, there has been a knock-on effect associated with the overclaiming in earlier years and that produces in total a larger sum.

  2. You say you were already considering but did the private sector auditors actually find these failures for you?
  (Professor Melville) No, they did not.

  3. Who are they?
  (Professor Melville) Deloitte and Touche.

  4. What we are seeing here is that the overclaims would not have been detected without the National Audit Office's investigation. Is that correct?
  (Professor Melville) No, it is not correct. It is correct to some extent, but we already had Halton College on notice from the earliest days. For example, in 1994-95 we had queried their claim for funding and held back £953,000. In 1995-96 we queried the growth that the college had claimed. We asked for it to be reviewed, the external auditors cleared their final funding claim and we proceeded. As the table in my report indicates, there was a relatively small overclaim in that year. In the year 1996-97, which was being considered in the spring of 1998, we had already held back £3.25 million from the college's grant allocation because we were concerned about the rate of growth and about some aspects of their provision. We were asking the college to justify their claim. They had not done so at the point when the whistleblower's letter was received.

  5. What effect will repaying these sums have on the ability of the college to provide adequate training and education for the local community of Widnes?
  (Mr Bolton) We are taking steps to make sure that the books balance for future years. That does regrettably entail a number of redundancies but they fall mainly in the area of dispersed provision or franchising, collaborative work, and therefore the core business of the college, the local community business, can and will continue.

  6. Paragraphs 3.21 to 3.24 tell us that you have been checking whether overclaims have occurred at other colleges. What is the outcome of those checks and how confident are you that overclaims like this are not widespread?
  (Professor Melville) Of course the Council already has a whole series of checks in place. We do over 300 validation checks for each of the individualised student record (ISR) returns

  7. How long has that been going on for?
  (Professor Melville) That has been going on since the existence of the ISR, which was in existence from 1995-96[2]. Clearly we have learned some very clear lessons from Halton. We have looked at a range of colleges which have similar profiles to Halton College and reviewed their funding claims. There are round about ten colleges which are very similar to Halton in a number of respects, in terms of their dependence on franchising, their distance provision, using assessment of prior learning and so on, relatively unusual methods of provision. We have reviewed those; we are in the process, now that the data for last year is in place, of reviewing those and we expect to produce a report in May of this year[3]. We have also looked at the issue of the transfer of provision. You will recall from the report that the college reclassified some of its provision as being direct provision rather than franchised provision. The Council has a different rate of funding for franchised provision: it is lower. We have found six colleges which have had major reclassification from 1997-98. This was only likely from that year because of the change in the rates of funding for the two types of provision.

  8. Could you explain reclassification?
  (Professor Melville) It is simply that in the case of Halton provision which was franchised was simply labelled by the principal as being direct provision as though delivered by the college rather than by a third party. The governors in fact picked that up and of course there was a reduction in the funding associated with that incorrect classification. We found six colleges where extensive changes in the proportion of direct to franchise provision has taken place for that year and we are investigating each of those. We have asked them to provide an auditors' report to justify those changes.

  9. So we might see six or more which fall into a similar category as Halton.
  (Professor Melville) We do not expect so because a number of these colleges actually indicated in their strategic plans that they would move from franchised provision to direct provision. This was as the result of a number of signals, in fact discussions which went on in this Committee a year ago and the steps the Council has taken to ensure that colleges operate within their local areas. We have banned from this year any growth in distance provision for colleges. Any new distance provision is now banned and so of course colleges are reading the very clear writing on the wall and reducing their franchising provision. Some of that we expect to be perfectly appropriate. We have no evidence to indicate that there is another college in Halton's position other than Bilston College.

  10. Parts 4 and 5 of the report indicate that the Board did not always know all they should about what was happening at the college. What action are you taking to ensure that the governors are sufficiently involved in strategic decision-making and are adequately informed about all the significant developments?
  (Mr Bolton) The governing body set up three internal review groups to do with governance, management, the internal funding claims and financial regulations. Those three internal review groups have now concluded and actions following that have been a total revision of the financial regulations, a change in the reporting format to the governing body, more frequent meetings of committees, the designation of additional posts as senior postholders with direct access to the governing body and a review of the financial regulations and code of conduct and procedures. We would now expect the governing body to be fully and properly informed about all the major parameters surrounding any major decision prior to it being made.

  11. Are you confident that something like this could not happen again at Halton?
  (Mr Bolton) With the present systems in force, yes, I am.

  12. Paragraph 5.12 suggests that the problems of governance at Halton which we have heard about are not unknown at other colleges. What steps are you taking to improve governance across the sector?
  (Professor Melville) We have taken a number of steps already, both in response to the report and as part of systems which were just coming into place at the time that these matters first began to be investigated. In particular, we have introduced a regular review of all colleges three times a year, what we call the regional review process. All matters associated with colleges are in fact reviewed on a regular basis. This process has been commended in the NAO's report on Gwent as a possibility for the Welsh Funding Council. We are also taking very seriously the business of developing further the support and training of governors. We have regular meetings with chairs of governors on a regional basis. I meet with them and we specifically focus on issues which are important at that time. We have the annual general meeting with the governors, we have set up the new good governance group which will revise the guide to governors which was published in 1994, the guide to clerks which was published in 1996 and update other guidance published in 1996. All of the matters which are in the NAO's recommendations will be included in those recommendations.

  13. Mr Bichard, in view of the evidence we have heard recently on Southampton and now on Halton, what changes are you likely to make to the governance and management of colleges following the outcome of your consultation exercise "Accountability in Education"?
  (Mr Bichard) May I say that I think the problems, the issues we are talking about today, are of a different order to the problems we were discussing so far as Southampton is concerned. I take a very, very serious view of what has happened at Halton and what has happened at Bilston. This is an excellent report but my only criticism would be that in terms of its recommendations it does not go far enough and we do need to take very aggressive action to ensure that this sort of thing cannot happen again. We need to make sure at the same time that we do not stifle the proper entrepreneurial activity of the colleges but clearly this sort of thing cannot be allowed to go on. Ministers have already announced a number of changes which will come into effect in August of this year which concern the need to maintain a register of interests, of governors' interests, the independence of clerks, the legal requirement for an audit committee and the fact that non-governors can sit on that audit committee. So we do have some things already in hand but Ministers will be announcing this week a further raft of initiatives to deal with Halton and Bilston and that would include, for example—I will not take too much of the Committee's time going through every detail, but it would include for example—the fact that in future external and internal audit will not be done by the same company, it will give the FEFC powers to nominate a minority of governors where they have cause for concern about a college, it will give the FEFC the power to require observers and assessors to attend governing bodies, it will take the external audit responsibilities away from the external auditors who have currently been responsible and give them to the FEFC or their approved contractor. I shall be taking up with the auditors' professional body the concerns I have about the quality of external audit, not just at Halton, but at some other colleges as well, and the Department's internal auditor will be reviewing the FEFC's inspection and audit process and also carrying out a sample review of the internal audit arrangements at colleges. There is a further raft of initiatives but I hope that gives a flavour of how seriously we take this.

  14. That is helpful. I have some sympathy with your comments on the external audit provision there. In view of these difficulties here and Swansea—Southampton you say is less serious but nevertheless it is there—with business development activities such as franchising and overseas activities, what are you doing to ensure that the universities and colleges plan business development properly and manage the risks involved?
  (Mr Bichard) As far as franchising is concerned we have taken a lot of action since we had a hearing here to constrain at least the worst abuses of franchising. We must never forget that in some circumstances franchising can be a good thing but we have limited franchising very substantially so that the first priority of every college is clearly local recruitment and we do not get into a situation where colleges are franchising, as was the case in one instance, in every local authority in the country as well as elsewhere. We have tightened up substantially on franchising and external franchising has clearly peaked and that is right. We do, however, need to take seriously the issue of governor training and expertise and competence and we shall be announcing this week that we expect in future that every governor, every newly appointed governor in a further education college in this country, will be involved in training within the first six months of their period of office and that training will encompass financial modules and business development modules. We also need to be concerned not right across the sector but we do need to remind ourselves today that an awful lot of good things are going on in the FE sector. We shall not be discussing those but I need to make that clear. We also need to be concerned in some cases about the quality of the principals. We shall be announcing that we shall be looking at developing a qualification for aspiring principals and we shall be looking again at the training and development we offer for principals in post. I hope all of that will begin to raise the competence and the quality right across the sector.

  15. Mr Taylorson you were Chairman of the college's finance committee from 1997 to 1998. There must have been some staff in the college who knew that all was not correct with the funding claims? Why were you not aware of the problems of overclaiming?
  (Mr Taylorson) We can say quite specifically that we had been audited over a number of years by professionals and on no occasion had any doubts been raised that the audits were correct.

  16. Does it concern you that since 1992 roughly 400 circulars plus have been sent to colleges, many of them relating to financial regulations, audits, financial matters and yet we are still seeing the problems we are looking at today in terms of Bilston, in terms of Halton and you may be aware that today we have heard on the news about Wirral College and major problems with overspending there. Is it not a case that the quantity of advice from the FEFC has not been matched by the quality?
  (Mr Bichard) We should always be concerned at the amount of advice which is going out both to colleges and to schools. We have, however, been going through the establishment of a new sector, we have been setting up new funding arrangements, we have had need to offer an enormous amount of guidance to colleges through the FEFC so I am not surprised at the amount which is going out. We should always be concerned about the quality and the clarity of that advice.

  17. Professor Melville, I heard you say before that there had been concerns about incorrect claims at Halton College for quite a number of years. Is that correct?
  (Professor Melville) Yes.

  18. Why is it that the only reason this came to public knowledge was as the result of a whistleblower and none of the checks at the college, the external and internal auditors, your inspection teams ever picked up the problems which are now appearing today?
  (Professor Melville) With respect, the point I was attempting to make was that we had picked up problems at Halton College and we had already held back a very significant sum of money from their previous year's claim: £3.25 million, one of the largest such sums we had ever held back.

  19. The actual £6.4 million, if we stick to that figure, was not picked up before.
  (Professor Melville) The £3.25 million turned out to be pretty close to the sum of money which was arrived at for the three years up to that point.

  20. It was not £6.4 million.
  (Professor Melville) It was part of the £6.4 million.

  21. It was not £6.4 million.
  (Professor Melville) There were then two further years.

  22. It was not £6.4 million though.
  (Professor Melville) There were two further years after that.

  23. One of the problems I have is that colleges are audited both internally and externally and nothing is being picked up. Could you tell me how the governing body of a college, if the auditors do not pick it up and you do not pick it up, should be or can make themselves aware that claims are being made incorrectly or inappropriately for students? How can governors make themselves aware of that if the auditors and all the systems currently in place within the FEFC cannot pick that up?
  (Professor Melville) You raise a matter which is of great concern because clearly in this case, the principal, who set about a particular course of action, in fact misled everybody, not just the internal and external auditors but also all of his colleagues and the governing body.

  24. How did this one man basically completely make sure no-one knew what was going on at the college? How was he able to? Is there something special about this guy that no-one anywhere could pick up what he was doing? What you are telling us is that there is a major, major problem in terms of the safeguards which you and the college should have put in place.
  (Professor Melville) Let me stress first of all that the audit process is retrospective.

  25. Five years.
  (Professor Melville) It picks up matters after the event.

  26. It was five years.
  (Professor Melville) With respect, we picked up the issues in the 1996-97 claim; the earliest points were in the 1993-94 claim and were relatively small funds by comparison.

  27. How are governors supposed to know if none of those checks brings it to their attention? How are governors supposed to know that these inappropriate and incorrect claims are being made?
  (Professor Melville) What is clear is that there is need for further guidance to governors. There is need actually for guidance which relates specifically to the issues of asking the right questions, being prepared to push the principal and you will see in the recommendations which we made that the college produced from its joint study following the early days of my reports a whole set of additional checks.

  28. Despite over 400 circulars going out to colleges since 1992 you still have not got it right.
  (Professor Melville) I would say, with respect, that the majority of colleges do have it right, but this is a particularly singular case which the processes have detected. We should not underestimate that there were 14 very complex allegations. These were brought to light and investigated in a period of two months.

  29. Could we just explore other colleges? I notice you say you do not believe the deficiencies identified at Halton College are representative of further education. How is it, whether it is a NAO service or by your own auditors, that 40 per cent did not have a procurement strategy, more than half the colleges could not say easily how much they were spending on foreign travel, 61 per cent of colleges were concerned about financial regulations and financial regulations did not specify what should happen, who should authorise the travel expenses of the principal. Seven per cent of colleges were unable to say whether they had any credit cards; could not say whether they had any credit cards. And we go on. It says 43 per cent of colleges had completed their returns late. This does not strike me as being an isolated incident. Whether it is one or two parts of the issues which happened at Halton College a large number of colleges have not got their act together in terms of the financial controls. Even if you go down to seven per cent who did not know whether they had a credit card.
  (Professor Melville) May I say that all of the things you raise and all of the matters raised are matters of great concern. It is a matter of great concern that each of those figures is there.

  30. You said before that hopefully this is an isolated case. Would you like to retract that?
  (Professor Melville) No. I was just going to attempt to distinguish between the issue of colleges in which we find problems and colleges where those problems lead to specific wrongdoing. What we are talking about here is a college management which deliberately misled the auditors, governors and the Further Education Funding Council. We of course check and we have checked similar colleges to see whether those characteristics which we observe in fact have led to such overclaims and we have systems to do that. We have worked our way through.

  31. We have been over this ground before. In all honesty you have not answered my question but there is clear evidence from what we see from the NAO and from your own auditors about concerns about regulations even down to procurement strategy of computers. What I come back to briefly is that part of the problem is that the employment of auditors of colleges by colleges is done on the cheap. Very small amounts of money are spent on internal and external auditors so basically what you get are the most inexperienced auditors from the company and usually the ones who are not up to the job really. That is why we are seeing some of these problems. Should you not have been reinforcing that in the guidance or making sure that a proper amount of money was spent on getting good quality audit within colleges?
  (Professor Melville) The point you make is perfectly right and we have expressed concerns on that, we have reinforced it in our guidance and it is clear that the sector as set up, the audit companies, the large audit companies—there are six audit companies who have about 80 per cent of the audit in colleges—in fact underpriced and it has led to some of the issues you raise. However, the specific steps which Mr Bichard announced about the Funding Council taking responsibility for this very difficult area of funding unit claims will be a very important step in that regard because that is the issue here in external audit.

  32. May I suggest that whoever may be writing your financial advice circulars you want to get someone who knows about quality rather than quantity? Let us turn back to the college now. The principal and vice-principal resigned a week last Wednesday. Did they receive any payoff at all?
  (Mr Taylorson) No, they were paid until five o'clock on the day on which the hearing was eventually concluded. All they got was their statutory holiday pay of 22 days.

  33. Is the college taking any action to recover from the principal and vice-principal some of the monies it now has to pay back given that in the case of the principal he was reportedly the highest paid principal in the country and something like 10 per cent of his salary was based on performance and part of that must have been down to the number of students and money he was bringing in? Is there any attempt to recover that?
  (Mr Taylorson) Yes, we are in the process of taking legal advice on that at the moment.

  34. When do you expect to have an answer on that?
  (Mr Taylorson) I would hope in the next 14 days.

  35. The college governors did not suspend the principal until around the end of May. Were you happy with that decision, given there were at least two other points at which he could have been suspended: in February when initial meetings took place and in April when more detailed meetings took place? Did that not allow him a good six to eight weeks basically of free access to all college documents which he could have used in whatever way he wanted?
  (Professor Melville) Yes and when I met with the chairman of the governors on 20 April—you will recall that we had our preliminary investigation into the college on 2 April—I did recommend that they should consider suspending the principal and the deputy principal during the investigation. In fact the college did not do that until 22 May when I attended the governing body and outlined my emerging conclusions.

  36. Do you believe that was too late, that they should have done it before?
  (Professor Melville) I do not believe there was any material effect on the conduct of the investigation. We particularly asked our auditors to look at that.

  37. So in the public sector, where it is generally the case once suspicion has been raised that an employee is usually suspended until an investigation takes place, you did not do it in this case. Do you believe in retrospect that was obviously a big mistake?
  (Professor Melville) It was my view that it should be done[4]. You will appreciate that the Funding Council has no powers to suspend.

  38. Did you tell the college they should have suspended him before then?
  (Professor Melville) I did. I advised the then chairman on 20 April.

  39. Mr Bolton, may I ask you whether you feel that the college's expenditure, for instance the £31,000 on prints, was the sort of expenditure it should have been indulging in when there are more traditional parts of the college which are in need of important investments? Do you have any views on that?
  (Mr Bolton) It was a wrong use of public money.

  40. Has an investigation taken place into the role of the senior management team in all of this? If there is one, when do you expect that investigation to be completed?
  (Mr Bolton) Yes, there is an investigation into the possible culpability of the rest of the management team and that will be completed by the end of May.

  41. Professor Melville, why in your report did you not call for the governors to consider their position, given that they have now done it themselves and decided to step down? Why also did you not make any real comment about the senior management team and ask for their position to be considered and whether the clerk of the governors, which the National Audit Office particularly made a point of, was far too close to the principal and the management of the college? Could you make any comment on that?
  (Professor Melville) The scope of the investigation was limited specifically to the action of the principal and the deputy principal because that was felt to be the prime issue. I did make a recommendation that the board should consider the position of the then chairman and he subsequently stepped down from that position and the board. We took the view generally—if you are asking why we did not take a view on the board earlier—that it was important that the joint investigation took place, that board members carried the process through, most importantly, given the litigious nature of the principal, that the board was able to carry through the disciplinary process which might have been jeopardised if the board had stood down at that time.

  42. You know that something like 150 redundancies are going to have to be made at Halton College. Obviously the Department and the Funding Council need to ensure that provision to meet the Government's requirements for education and training in Halton is continued. Could you confirm here that you will be doing all you can to ensure that the college can get back on its feet after this terrible situation, because at the end of the day the students, the staff and the public and the community of Halton should not have to suffer any reduced provision as a result of it. Would you be doing all you can to ensure the college gets as much help as possible to get back on its feet and go forward with the new principal and vice-principal and governors?
  (Mr Bichard) We certainly will and I am happy to confirm that. You just need to remember, however, that what we have here is a college which has been overfunded for its level of provision for some considerable time. That is exactly what we are talking about. It is not surprising if we are going to get the funding right that we should find that there are actually more staff than another college would need to deliver the same level of provision.

  43. So it should be put at risk.
  (Mr Bichard) We ought to be able to protect the level and quality of service at a lower level of staffing. I know that is extremely unfortunate for the staff involved but that is one of the inevitable consequences of what we have seen at Halton.
  (Professor Melville) The final consideration of the Council in this is to ensure that provision continues in Widnes and Runcorn and Halton and therefore we are already discussing with the college the period over which the payback of monies takes place; that is normal practice. We must not destabilise the college in terms of the future but we are also discussing sensitively with the college, the college's proposal for a development in Runcorn and we would hope to phase the repayment in order that what are extremely positive plans that the new principal[5] has put in place for the college, local provision, focusing on the local population, are able to be implemented.

  44. Could you confirm whether you are going to sack the auditors?
  (Mr Bolton) The position of the auditors will be reviewed at the end of July and in the light of performance to date I would guess it is highly unlikely that they will be re-engaged.

  45. Do you think they should go now?
  (Mr Bolton) The problem there is that if we sack the auditors at this point we have to engage a new set at a very short notice for a few months. Given that their contract finishes in July, it seems sensible to let it run out and then make a change.

  Mr Twigg: I do not think I would feel very confident that they could do the job for a few months given their past record.

  46. Could you tell the Committee briefly for the record the precise role of the various different auditors in this inquiry, that is Deloitte Touche, KPMG, Robson Rhodes and your own Funding Council audit service?
  (Professor Melville) First of all Deloitte and Touche are the college's external auditors. Colleges are obliged to have both an internal and an external service. Deloitte and Touche in fact carry out both the internal and the external audit for the college. Robson Rhodes were the forensic auditors whom the Funding Council commissioned to carry out the detailed investigations of the overclaiming and all the matters in this report. Robson Rhodes produced a report for our legal advisers and for me and that of course formed the basis of my report of which I think you all have copies. KPMG were the firm of auditors which the college commissioned to carry out a series of studies into various aspects. Following my meeting of 22 May last year with the college governors, I required them to set a series of steps in place to review their practices and so on and they commissioned, after competitive tendering, KPMG to do that. Our own auditors are part of the audit service which is provided by the Funding Council. They have a function which is to do with regularity audit of colleges. On a four-yearly basis along with our inspectorate teams they review the internal audit arrangements of colleges and they review the compliance issues of colleges with financial memoranda and various financial issues.

  47. Substantial professional fees have been incurred by these various sets of auditors and largely they failed to uncover the problems, particularly it seems to me Deloitte Touche who carried out both the external and internal audit function. In a commercial company, the Companies Act would preclude one company carrying out both external and internal audit. Why was this ever permitted in the first place?
  (Professor Melville) The Council took the view that this was an appropriate practice from its inception along with other Funding Councils' similar practice, that is that this should not be banned. It is in line generally with Government guidance and in particular, given a number of colleges are quite small, a budget of less than £2 million, that this was possibly a means of achieving better value for money. However, as Mr Bichard has just announced, in future that will be something which we will not allow, that is that the two audits should be done by separate companies

  48. So it will not be allowed in future.
  (Professor Melville) Whilst I would agree that the evidence is clear that Deloitte and Touche have failed the college, I would not like any suggestion that Robson Rhodes have failed or that KPMG have failed in this process. They have been extremely competent.

  49. That is why I specifically framed the question in the way I did. Are you looking to take any action against Deloitte Touche for their shortcomings in their audit?
  (Professor Melville) This is a matter for the college governors since they are the contractors for the audit. However, we have already taken action specifically relating to Halton. We meet with the main audit companies every year, we have had a meeting this last year for the top six auditors who audit 80 per cent of the colleges. We have called in Deloitte and Touche and gone through the issues in the report with them and asked for specific improvements in the way they perform in a number of colleges in the sector. We have of course started from last year, and the report notes this, reviewing the work of external auditors and Deloitte and Touche have been part of that process.
  (Mr Bichard) May I make it absolutely clear that the Department would expect the college, supported by the Funding Council, to seek compensation?

  50. Thank you for that, Mr Bichard, that is helpful. May I take you to paragraph 3.6? In view of the fact that the auditors failed to pick up that 8,000 students had been claimed and only 3,234 were in the correct loadband, at the same time sufficient resources were not devoted to that higher loadband, in other words the two did not tally at all, how could the 8,000 figure possibly have been reached if the resources for only 3,234 students had been allocated?
  (Mr Bolton) The allegation gave a figure of 8,000 but in fact when the allegation was investigated it only related to 3,234 students and therefore the allegation was incorrect in the number of students mentioned.

  51. Mr Taylorson, how long have you been on the governing board? I know you are chairman now, but how long have you been on the governing board?
  (Mr Taylorson) About five years?

  52. You presumably attended the meetings of the governors. It does seem that there was no proper financial budgeting at all, because if you did not know, if you did not have proper business plans for foreign ventures such as the venture in China, you did not know how much was being spent on away-days, you did not know how much was being spent on etchings, you did not know how much was being spent on credit cards, how could your governing body possibly have had a proper financial budget and if it did, why did it not reconcile it properly to show up some of these shortcomings?
  (Mr Taylorson) In general terms, the financial controls were lacking. When the original controls were set up and the college was incorporated, I believe at that time they were considered to be quite satisfactory. In fact experience has shown and we have since dealt with it that they had to be tightened up very considerably. May I deal specifically with the etchings? It was completely and utterly a surprise to any of the governing board that etchings of that size had been bought. I can tell you quite clearly that on one occasion I was asked by the then principal whether he could buy some prints for the wall for the new office block which had been built. Perhaps it was my fault that I did not ask him how much he expected to spend on it, but my interpretation at that time was if he asked to buy some prints I was quite clear that he was talking about £10 or £15 prints which would be quite normal. When it became apparent that he had spent that amount and it became apparent by an investigation which we ourselves arranged with KPMG[6], it came as a total shock and we could not defend it in any way whatsoever.

  53. Is that money recoverable?
  (Mr Taylorson) We have endeavoured to get the gallery in question to take them back. The terms which they have offered are frankly rather disappointing.

  54. May we know what the terms are?
  (Mr Taylorson) At the moment they have offered 50 per cent and a percentage if they get a higher sum than that. Under the new regulations we have to put the thing out to five tenders and we have not had a great deal of success in that direction.

  55. Surely you had a basic budget and how could it possibly be that a principal could spend the sum of £31,000 for these etchings without it appearing in your accounts somewhere?
  (Mr Taylorson) Rightly or wrongly that at that time was in his terms of reference. He could spend that amount of money without reference to the governing body. That has since been changed but it was one of the weaknesses which we accept.

  56. What controls have you put in place? We had exactly the same problem with the Southampton Institute where taxpayers' funds of up to £350,000 could be at risk without any reference to the board chairman and the board of governors at all. What controls have you now put in place and what limits of expenditure can the principal or anybody else at your college incur without reference to the board?
  (Mr Taylorson) The principal's maximum amount which he can spend without reference is £25,000, but on specific items anything over £2,500 has to be referred.

  57. So you are confident, absolutely confident, that mismanagement on this scale could not occur again at your college without your board of governors knowing about it?
  (Mr Taylorson) The answer is yes.

  58. May I ask you a question on this committee structure and take you to paragraph 5.17 on page 41? The Funding Council now requires colleges to rectify the shortcomings of committee structures found by the Audit Service. Have you recommended those guidelines in full in terms of a new committee structure?
  (Mr Taylorson) We have indeed and we have in fact now started a curriculum and quality committee which was not in place before.

  59. Professor Melville, may I just check this with you? Can we be assured, now that this has occurred both in the further sector and in the higher sector, that all the further education colleges under your control will now have an absolute guideline that expenditure above £25,000 cannot be incurred by any principal or official at any of your colleges without full reference to the board of governors?
  (Professor Melville) We would want to consider carefully what the actual figure was. We have not up to now set that figure and there is a graph in the report which indicates the range. We have taken the view that generally figures above £20,000 are inappropriate. However, for some colleges, relatively small colleges, a figure of £20,000 might be regarded also as a high figure. We are slightly reluctant to set a specific figure but would want to give colleges guidance at round about that level.

 60. Have you given any guidance on this?
  (Professor Melville) No, we have not, but this is a consequence of the specific issue in the report and we will do so.

  61. You expect to issue guidance within the very near future.
  (Professor Melville) Yes.

  62. So if any of these sorts of things are going on we can be assured that it will be uncovered?
  (Professor Melville) Under cover of the letter I sent out with the report and my report I have already drawn specific attention to a range of these issues of which that particular issue you raise is one and we shall be following that up with more detailed guidance and of course as part of the review of good governance.

  63. Can we be sure that all audits in future will audit that matter very carefully?
  (Professor Melville) Yes, you can be absolutely assured that that will be included within the audit requirements.
  (Mr Bichard) May I add for completeness that one of the conditions of grant—and everything I have referred to earlier will be a condition of grant—we will now require is that colleges must publicise travelling and hospitality expenses in their annual accounts and we are looking to the FEFC to audit expense regulations in all colleges and to certify that they are reasonable, again as a condition of grant.

  64. Just a point of clarification. Mr Clifton-Brown asked you whether you knew about the £31,000 expenditure on etchings by the principal. You said that sum was within the principal's terms of reference. That was not quite the answer to the question he asked. Did you know?
  (Mr Taylorson) The answer in that case is that we did not know about that expenditure when it happened, no.

  65. I think I told you before, Mr Bichard, that when I referred Swansea and Southampton to the National Audit Office I suggested to them that there would probably be many more colleges in a similar type of situation. By comparison with this Swansea and Southampton were amateurs. They did not apply themselves diligently enough. May I just ask one question of Professor Melville first of all? I understand that when your Funding Council Audit Service asked for access to the papers for 1996-97 on funding claims, the external auditors, that is Deloittes I assume, actually refused to allow your audit services access to the working papers. What was that all about?
  (Professor Melville) Yes, that is correct. This was not specifically relating to Deloitte and Touche and Halton, it was a general matter. We decided that it was necessary, in the light of other matters which preceded this, that we should have access to the working papers of auditors in order that we could better review and carry out some of the things which have already been discussed. We approached all of the main auditors of colleges and they collectively, along with support from their professional bodies, refused to give us access to working papers.

  66. On what grounds?
  (Professor Melville) On the grounds that ... Perhaps I should not judge their motives but I believe it is simply that they did not wish us to reveal some of the detail which might lead to further claims against them.

  67. They were all covering their shoulder-blades, were they not, against possible legal action? This is astonishing. Can we have a list of those auditors who did refuse access[7]? I should like to know whether they are still working at all within this sector because I think this raises grave questions about whether they are suitable for employment. Can we go to your own report, April 1999, the Funding Council Halton College report? I am just trying to get a picture of the magnitude of what really went wrong. My feel at the moment is that we are rather understating the scale of all this and understating it we are also failing to understand the ineptitude of the internal and external auditors. You do say in table 1 on page 38 that the total clawback would be £10.61 million. That is an estimate.

  (Professor Melville) Yes.

  68. Then in the next paragraph you say that the college will owe the Council £10.61 million (not including the £3.25 million already held back). So we are talking about £14 million.
  (Professor Melville) Yes, that is correct.

  69. How does that compare with the annual budget of the college?
  (Professor Melville) It is of the same order of magnitude.

  70. So a year's money has gone and the auditors did not even notice it.
  (Professor Melville) You are absolutely correct in your statement. May I just distinguish the three columns which are there?

  71. I do not really want that thank you. It is good of you to offer but no doubt one of my colleagues will ask that. Most of us can read tables so we will ask if we need information. This £14 million is not just a financial scandal it is actually a personal tragedy for many people, is it not: 177 jobs are going, 147 redundancies and another 30 posts which are not being refilled? That is correct, is it not?
  (Professor Melville) Yes, that is correct.

  72. One hundred and seventy seven innocent people are paying for the profligacy of a very, very small number at the top of that college, the governors included. Is that correct?
  (Professor Melville) The situation is as indicated by Mr Bichard earlier, that the college had expanded beyond its capacity to deliver and is now contracting.

  73. We understand that. I am asking whether my summation is correct, not whether the report is correct, and I am sure Mr Bichard would tell us nothing other than that which is accurate. We expect nothing less from him. As far as these 147 people are concerned, have you done an estimate of the redundancy packages which will be involved?
  (Professor Melville) We in the Funding Council have not. It is a matter for the college.

  74. Has the college done an estimate?
  (Mr Bolton) Yes, if all the redundancies take place it would be of the order of £1.8 million.

  75. So in addition to the £14 million which is involved in the clawback and the already withheld, nearly another £2 million will now have to be spent in order to put people out of work.
  (Mr Bolton) Yes.

  76. I am not blaming you. I know you are the poor inheritor of the situation. I just want to get the position clear. We are talking of £16 million, is that correct, all as a result of the activities of a few people?
  (Professor Melville) Yes, you have added the figures up correctly.

  77. It was easy enough even for me to do. We have a situation which is almost mind boggling. We are told on page 22 of your report in paragraph 110 that the principal and the vice-principal accompanied each other on almost all trips. The principal spent 191 days away, most of them abroad and the deputy principal spent 163 days away. It is just as well they got on well together, is it not? I did not hear your answer.
  (Professor Melville) I am sorry, I did not realise it was a question.

  78. May I turn to you, Mr Taylorson. Did nobody notice? You were on the governors? Did you not go to the college some times and think it was strange that neither of them were there again and wonder where they could be? Did anyone ask questions like that or did you not even notice it was going on?
  (Mr Taylorson) The answer is that the governors at that stage in fact met only three or four times a year apart from the odd committee which took place in between the governors' meetings.

  79. In that case the statistical chance of you seeing them must have been negligible.
  (Mr Taylorson) We certainly did not know that they were away that amount of time.

80. You did not know they were away that much.
  (Mr Taylorson) No.

  81. That is strange, because some of you were with them, were you not? Some of the board went along with them.
  (Mr Taylorson) Not on many occasions.

  82. Let us go further down that page. They went on a 19-day round-the-world trip to Hong Kong, Australia and Toronto and back home at a cost of £15,000, of which only a maximum of seven days was business. The astonishing thing is that they took three days to travel to Hong Kong, whereas most of us do it in about 10 or 12 hours, something like that. Then four days to travel between Hong Kong and Melbourne, which would probably be about eight hours for most people, then four days to travel to Toronto from Melbourne. Were they travelling by balloon? Were they guests of Mr Branson? Did nobody wonder about these things?
  (Mr Taylorson) It is indefensible. We cannot excuse it and we cannot explain it.

  83. Who was the ex chairman? I know you are not the major culprit in all this but who was the chairman at the time?
  (Mr Taylorson) Mr Thomas.

  84. Mr Thomas must have had some idea of what was going on because on page 23 of your report, Professor Melville, you say that it was not just the extent of the overseas trip but the facilities enjoyed were excessive.
  (Professor Melville) Yes, I did.

  85. No-one can accuse you of understatement when we look at the facts. The chairman, principal and deputy principal went out on intense college business and dedicated themselves so completely to the work of the college that they drank £142 of drink at one function as far as I can see from that report. Was this never found by the auditors at all and drawn to your attention?
  (Mr Taylorson) It was not found by the auditors. I presume it was agreed by the chairman who was with them on the trip in question.

  86. He was a consumer. He was looking after the consumer interests there in a very personal way indeed. In the same way he went to France and no travel by train or in your own mini for him. They travelled in a rented Lexus.
  (Mr Taylorson) Correct.

  87. At a cost of £1,000 just to rent a car. The principal and vice-principal stayed in an hotel in Mayfair on another occasion at a cost of £290 each. Were none of these things discovered?
  (Mr Taylorson) They were discovered in the investigation which the board[8] instigated. At the time it certainly was not known to the board, it may have been known to the then chairman at the time and I am quite sure that on a number of occasions the principal did ask the chairman whether it was in order to go or alternatively whether the chairman would go with him. I cannot answer for that because I do not know what went on between the two of them.

  88. Obviously you have been let down badly by the auditors, there is no doubt about that, is there? Would you agree?
  (Mr Taylorson) I would agree entirely?

  89. Would you agree with that Professor Melville?
  (Professor Melville) Yes, these matters should have been picked up by the internal audit process.

  90. Who were the same people as the external people.
  (Professor Melville) Yes.

  91. It did not matter which job they were doing, they were equally bad. Just to make it unanimous, do you agree, Mr Bichard, that they have all been let down by the auditors?
  (Mr Bichard) I agree they have been let down by the auditors. It is comfortable to blame everything on the auditors, but we cannot blame everything on the auditors. It is disgraceful behaviour.

  92. No, I did not suggest such a thing, nor would I.
  (Mr Bichard) What it shows is what happens when you have a strong principal, or in this case principalship, a weak audit process and a governing body which is not on top of it. Those are the issues we really need to focus on.

  93. A deputy principal who is compliant in going along with the plans of the principal and a chair who gets his share of the spoils. But it was not just the chair of governors, was it? It says on page 24 of the Funding Council's report that 23 members of the college staff and governors—governors in the plural, so it is not now just the chairman—attended the League of Innovation conference in 1995, which happened to be held in Kansas. Did you go?
  (Mr Taylorson) I did.

  94. You did.
  (Mr Taylorson) I did.

  95. So you noticed that bit of the expenditure. Did you think it was a little excessive, 23 trotting out? Did you charter an aircraft for the college? How did you do it?
  (Mr Taylorson) No, we did not. Perhaps I could answer the question.

  96. Please do.
  (Mr Taylorson) At the time the college, rightly or wrongly, had determined that it would find out a little more about how American colleges, the community colleges, operated and particularly their ways of raising money other than government funding. We felt that there was a certain amount to learn from that and at the same time the principal of the day was very keen to get the college staff involved with giving presentations to the American community college conference. Of that number, five or six governors attended and it was felt that it was an opportunity for the governors to find out a bit more about the staff whom they saw very, very infrequently indeed because there was no opportunity for the staff to meet up.

  97. No, the governors were not exactly hands on, were they, except where air tickets were concerned?
  (Mr Taylorson) We are not making excuses on that.

  98. Five out of how many governors? How many governors were there?
  (Mr Taylorson) On the board or on that trip?

  99. On the board.
  (Mr Taylorson) Eighteen.

 100. Almost one third went on that trip. Another 13 members of staff and governors went again to a League of Innovation conference in 1998 in Miami.
  (Mr Taylorson) No, that is incorrect actually.

  101. Is it? How did you get it wrong Professor Melville?
  (Professor Melville) I find that very difficult to understand because this figure was checked with the college.

  102. Why is it wrong?
  (Mr Taylorson) Two governors went in 1998 only and 11 staff.

  103. That makes 13; that is what it says.
  (Mr Taylorson) Yes, if you are including staff and governors.

  104. You are vindicated, Professor Melville.
  (Professor Melville) Thank you.

  105. And the governors stand further indicted. Were you one of the two?
  (Mr Taylorson) No, I was not.

  106. May I say he has read out all the most interesting parts of this report but perhaps I could follow on? My question relates to the delay that there has been in taking disciplinary action in relation to the principal and vice-principal. This process started in February 1998 and still no disciplinary action. If you wait until the final report, this report was produced in December, that still leaves five months with still no disciplinary action. Before I go on to ask that question let me just allude to the round-the-world trip where it states quite clearly in the findings that only seven of the 19 days ". . . are given over unambiguously to college activities". In other words, 12 days holiday during that period. It goes on to say in relation to a trip to the Pompidou Centre, "The explanation given, that the project manager for a college new build project, a chartered surveyor, recommended that they should do so, is absurd". I could go on. A number of the other issues have been mentioned. In the light of this report, in the light of what has become available about the activities of the principal and vice-principal why have not disciplinary procedures been taken?
  (Mr Taylorson) The FEFC will confirm that a very strong defence was instituted by the principal and the vice-principal and the final report was only received in the middle of December. At that time the board decided immediately to institute disciplinary proceedings. At that time we received a medical note from both the principal and the vice-principal that they were unfit to take part in any disciplinary proceedings which we intended to institute. This delay went on from the beginning of this year until probably a month or so ago, when they still considered them to be unfit to give any evidence whatsoever.

  107. When you say "unfit", was this a doctor who provided a note?
  (Mr Taylorson) This was a doctor's note. At that stage we in fact made arrangements for our own medical adviser to go in and check them both to see whether or not there was justification in delaying it any further. He confirmed that they were in a medical condition in which it would be unfair to ask them to attend. At that stage we gave them an ultimatum that if they did not attend within the next 14 or 21 days we could complete the hearing without them. At that stage they made a sufficient recovery to come in and take part. That was completed about a fortnight ago, as a result of which they both tendered their resignation in the middle of the hearing.

  108. I want to come on to whether it is appropriate for them to have tendered resignations or whether the governing body should have had something to say about this activity but I want to turn to Professor Melville in relation to this. It was stated by Mr Bichard right at the very beginning that this was an extremely serious situation, much more serious than other reports which have come to the Committee of Public Accounts. They required aggressive action. You stated earlier on in relation to one of the issues raised "the wrong use of public money". Mr Bichard stated "disgraceful behaviour on the part of the principal and vice-principal". Do you think we have had aggressive enough action in relation to disciplinary action over the principal and vice-principal?
  (Professor Melville) I made my view clear in the conclusions in my report as you have it that the accounting officer was not an appropriate person to conduct the affairs of the college, in my emerging conclusions report on 22 May to the college. I believe it would have been possible for the college to act from that point although I should confirm precisely what the chairman has said that we had here two extremely litigious individuals who twice took the college to the High Court. It is one of the reasons why my report took so long to be completed, simply because at every stage we were faced with legal challenge and the potential for judicial review and therefore the need for due process. Rightly or wrongly the college took the view that they would wait until the final publication of my report in December before moving forward.

  109. I must say, in the light of this report, if they had gone to court with this as evidence, I do think they would have been in some difficulty.
  (Mr Taylorson) Throughout this whole unfortunate proceeding we were taking legal advice and that legal advice was very specific that you cannot in fact act without giving them a chance to defend themselves. It was on legal advice in fact that we acted.
  (Mr Bichard) Should it be necessary to suspend on full pay, as it is at the moment? The answer is no, and we shall be taking action to ensure that that does not happen in future[9]. Should it be possible for someone to be suspended for 12 months on full pay? The answer should be no, and we shall be taking action to limit the period[10] during which someone could be suspended on pay at any level.

  110. We talked about the etchings or prints earlier on. I wonder whether any consideration has been given, if we only receive 50 per cent as you suggested in return for these, to making a claim against the principal in relation to the outstanding amount.
  (Mr Taylorson) We shall certainly take legal advice on that. I do not know the answer.

  111. You have not considered it as of yet.
  (Mr Taylorson) I do not know the answer.

  112. In relation to all of these overseas trips where clearly—very clearly from the report—money has been used for things other than on behalf of college activities, will you be seeking to reclaim any of those amounts from the principal and vice-principal?
  (Mr Taylorson) We shall be looking into that at the same time.

  113. I do think that is something which should have been looked at earlier and is something which could very positively be looked at in the future. Mr Bichard, you mentioned earlier on this aggressive action. In an earlier comment on the report as far as the funding claims are concerned it was highlighted that there is a problem for the governing body in how it could find out that overclaiming is taking place. I think Professor Melville confirmed that was a particular difficulty. In the aggressive actions you have taken, which you listed earlier on, can you reassure this Committee that that sort of overclaiming, which would be the responsibility of the principal or someone on the senior management team, is something which is likely to be highlighted in the new arrangements?
  (Mr Bichard) There will always be a problem if you have a principal who is bent on defying propriety and a set of auditors who are incompetent. If they come together it will always be difficult. We need to minimise the damage that can do. One of the things we do need and we shall again make it a condition of grant, is that the audit committee of every college should have one member who is an expert, a financial expert, and that is not always the case at the moment. The FEFC have introduced already additional checks on student claims and we shall also be introducing further checks on governors so that for example a search committee, which every college now has, must evaluate the performance of governors before they are re-appointed and particularly before they are re-appointed for a second time. I believe that with the controls we had in place and the controls which we are now introducing, we will minimise the possibility of this sort of thing ever happening again.

  114. Perhaps you would like to comment, Professor Melville.
  (Professor Melville) As you will see in the NAO report at paragraph 5.6, page 38, the college have put in place something which we would regard as good practice, that is that ". . . all returns to the Funding Council will be fully explained by the Principal to the Board before being sent to the Funding Council". In the guidance we draw attention towards this, to specific things they should look at. What we shall be doing is making this matter a good practice issue through our good governance group and making recommendations on how boards consider things that they should have this as practice. We shall be giving them guidance on the questions they should be asking to ensure that they do have a full picture which squares up with the funding claim which the college is making.

  115. May I come finally to the position of the governors of the college? A decision was taken that the governors should continue. Was that a correct decision in your view in the light of the evidence which subsequently came to light that only the chairman should be named in this instance?
  (Professor Melville) Perhaps I might clarify the position I was trying to explain. During the investigation and particularly during the process to ensure that the principalship was properly dealt with, all of which were recommendations in my report, that was the position we took. Very clearly, now that the facts are fully available, then it is appropriate that the governors have agreed to stand down. I do not believe it is appropriate for these governors to continue to govern Halton College. If they do not stand down—which may be your next question—then I shall be recommending to the Secretary of State under section 57 of the Further and Higher Education Act that they be dismissed.

  116. Did you put that to them before they took the decision to stand down?
  (Professor Melville) We had discussions with the governors that this was the inevitable position. In particular you will see that the clarity on the total amount of the claim and the knock-on has developed through the course of the investigation and it was very clear that this was not just a one-off failure in the governance of the college but there was a systematic problem which came to light and as everyone has said this is clearly unacceptable.

  117. Mr Williams rightly made reference to the personal tragedy which this catalogue of events has led to for members of staff at the college who have done nothing improper and have probably done a very good job but nonetheless they are going to lose those jobs. The college is now in serious difficulty in getting back on its feet. Is this going to happen? It is not clear to me from looking at the figures that, given the level of recovery it is necessary to make, it is possible for the college to get back on its feet and provide a service to the people it ought to be serving.
  (Mr Bolton) I believe it is in so far as the college will operate in a very different way from the way it has operated in the past. It will now revert to, some might say, its proper role as a community college, focusing on local provision for the people of Widnes and Runcorn. As such it is likely to be only two thirds of its previous size. It will be a smaller college, it will be a local college and it will suffer some funding constraints. As Professor Melville has already said, the FEFC are looking sympathetically at our plans for the future which include the development of a site on the other side of the river, on the Runcorn site. Currently the college is only one major site at Widnes. We have been looking very hard at the redundancy situation and whereas the original statement for redundancy was 147, the latest figures we are now looking at are 114 redundancies plus 25 instead of 30 from natural wastage. That has got the figures down to 139 now. That is quite an improvement and I believe that if we can draw a line under the past regime and the different mission and begin to focus on our proper responsibilities in the local patch, it can be done. It will be difficult and there will be two or three very hard years, but I do believe that the service can be maintained for the local community.

  118. Mr Bichard, you said, when asked by one of my colleagues whether the problem has now gone away and we had a new start, that there will always be a problem if somebody, a principal, intends to defy propriety. So how can this Committee be assured that systems are put in place? It does seem to me that if somebody intends to defy propriety, yes, there will always be those individuals, but if there are proper control systems in place then they will be brought up short before they have the chance to take that action very far.
  (Mr Bichard) We need to remind ourselves that although this went terribly wrong at Halton and at Bilston, there is four times the audit cover for colleges now than before 1993. Every college in this country has something like 60 days a year of auditing. That will not reassure you because of the problems we have here. However, if you put that together with the changes which will come into effect in August, to which I referred, the fact that there has to be a register of interests, there has to be an audit committee, there will in future have to be an expert member of that audit committee, the clerk will be independent of the staff and responsible to the committee, if you put that together with the conditions of grant which I have referred to today, which I think totals something like 16, one of which I have not mentioned being that the governors must receive termly reports on the financial position in their college which will cover, as the NAO is suggesting, income and expenditure against each faculty, against the type of provision, it will include cashflow information and I believe it should include projections against profile for each faculty, if you put all of that together then I believe you have a regime which is likely, as likely as any regime, to avoid this happening again.

  119. You refer to the clerk. Can you just explain to me who that person is, what role they have?
  (Mr Bichard) The clerk to the corporate body will vary from college to college. The problem has been sometimes, only rarely but sometimes, that that person has felt that their loyalty was more to the principal than it was to the governing body. The changes which we are introducing from 1 August will make it absolutely clear that the loyalty is to the corporate body and in addition the clerk to the governing body will have the power to attend every committee in that college except when they are discussing matters which affect the personal position of the clerk. The person will be clearly independent and will have wide-ranging powers to visit any committee in that college. That is a change and a change for the better.

120. Is the clerk recruited in a way which ensures they are totally independent of the systems of the college and of the principal and indeed of any staff?
  (Mr Bichard) Ministers have considered very carefully whether they should go a step further and require that the clerk should not be a member of staff in the particular college. Ministers took the view that they would not go that extra step because they were concerned that the individual could then be so detached from the activity of the college as to not be able to make a proper contribution to the considerations of the governing body. Whoever is designated as clerk to the body must be clear that their loyalty is to that governing body not to the principal for the purposes of the governing body's activities.

  121. If it appears that they might not be quite as clear as they should be, that this is the case, that their loyalty is to the corporate body and not to the principal or any other member of staff, what will happen then? What could happen then and who would monitor or control that?
  (Mr Bichard) The FEFC in its inspection arrangements now looks at governance and management of colleges and grades colleges and I would expect that they would look at the way in which the clerkship to the corporate body is working and whether they are satisfied that it is sufficiently independent and is protected from influence say from the principal.
  (Professor Melville) I would confirm that. It is a specific part of the audit process which goes alongside the inspectorate process. We put them together. We require the colleges to review against criteria their own governance arrangements, that is they self assess and we check that self-Assessment against our view of what is going on. They are required to grade themselves, then we grade them. That is a specific issue. Let me mention some other checks which have been introduced. First of all, we have introduced new statistical checks which will pick up some of these issues where a particular college is claiming more than other colleges in the sector for the same kind of provision. We have reduced the scope for claiming different levels of provision; now only 20 per cent of courses are what we call load banded so the level of funding is simply designated and the computer system will throw it out if a college claims more for a particular programme than the set amount. We have listed each qualification; round about 13,000 of them are individually listed with how much can be claimed. We are introducing requirements for notes to the accounts for this year[11] which are about to go out that all overseas trips will be totalled, that is what is spent on overseas trips totalled in categories of governors, of senior managers and of staff so that there will be a public record of what is actually happening on overseas expenditure and we shall of course benchmark that as we bring the data together to enable colleges to see and to follow up issues. We will expect colleges to justify unusual levels of expenditure.

  122. In the case of this particular principal and vice-principal with whom all this problem arose, they became ill and were not able to attend a disciplinary hearing. Subsequently they were seen by a doctor who is attached to the college or used by the college, is that right?
  (Mr Bolton) Yes.

  123. They were still too sick to attend disciplinary hearings. How does this work? Does the college have a kind of occupational health person whom it uses?
  (Mr Bolton) No, on this occasion we found a doctor who agreed to examine the principal and vice-principal on behalf of the college and he indicated that they were both suffering to a degree from stress and anxiety.

  124. I probably would be in their position as well.
  (Mr Bolton) At that point the board rightly took the decision to move on, to continue with the disciplinary process in their absence because it was being prolonged obviously unduly and unnecessarily. When that decision was made then they made a sufficient recovery to come in and defend themselves.

  125. May I go back to Mr Bichard and repeat that you did say there would always be a problem if someone intends to defy propriety. The Committee has heard about new systems and new checks and balances and new controls which are to be put in place. Is that so? Is it still possible for someone who intends to defy propriety to do so in the further education sector?
  (Mr Bichard) When I said that there would be a problem I did not mean that it should be beyond resolution. Clearly there will be a problem if you have a principal who is determined to do these sorts of things and you have incompetent auditors; there will be a problem. What we need to do is to make sure that we have systems in place that one way or another expose this sort of behaviour. I do not believe that those systems were in place to deal with that—clearly they were not—at the time of the Halton affair. I do believe that what we are now putting in place will expose this sort of activity, all of these activities.

  126. Can we just call a spade a spade here? When we are talking about defying propriety, can we call it what it is? It is committing fraud. That is what this man has been engaged in. It is not the most sophisticated fraud. The principalship, the two of them together, have overclaimed from a big pot of public money which was available. They have then taken some of it and used it for themselves in ways in which it should not be spent. They have done it under the noses of the governing body who have not intervened. In fact some of the governing body also benefited from the overt obvious misuse of public funds. Meanwhile the Further Education Funding Council has not really noticed and has continued doling out to them vast sums of money. In addition we have had all these audits, internal, external, inspections, which have all come out all right. It suggests to me that the entire situation is a complete mess. Professor Melville, can you tell me how on earth, when this college was inspected between April and December 1996—I am looking at page 10 of the NAO report, paragraph 1.5—it was graded "2" for governance and management which equates to "strengths clearly outweigh weaknesses"? Can you just explain to me what the strengths of the governance at this college actually were?
  (Professor Melville) May I stress first of all that at that time audit was conducted separately from inspection. The inspection process did not consider financial matters. When I came to the Funding Council in 1997 we combined those processes so that these matters could be brought together. The Funding Council's Audit Service report in the same year as the inspection report, did draw specific attention of the governors to serious shortcomings in the control systems in the college.

  127. Can you tell me what the strengths of the governance and management at Halton College were which allowed them to be graded "2"?
  (Professor Melville) Yes, the inspection considers a whole range of issues. When we and the college subsequently engaged with KPMG to review governance and management, at my suggestion these matters were confirmed that the college governors had strengths in terms of the strategic vision of the college, in determining the overall direction and in fact in terms of their overall expertise. This was a set of governors who had a range of significant expertise.

  128. What you are saying is that the governors themselves had strengths, not that the system of governance had strengths?
  (Professor Melville) That is correct, yes.

  129. I am glad you cleared that up because I was wondering how strength could be a word which could be applied to what we see here. You have said that the principal and deputy principal were litigious by nature and you said also that on two occasions they took the college to the High Court by way of judicial review. Can somebody tell me what those occasions were and what decision they were judicially reviewing?
  (Professor Melville) May I just correct that? I did not intend to give the impression that they took the college to the High Court by way of judicial review. I suggested the threat of judicial review was put to the Funding Council just before Christmas.

  130. They threatened you with judicial review on two occasions.
  (Professor Melville) Yes, judicial review. No, let me clarify: on one occasion relating to the funding council. Of the two occasions relating to the college, the first occasion was when the disciplinary panel was established and they took the college successfully to the High Court complaining that the chairman of the disciplinary panel was not sufficiently impartial. He had been involved in one of the college review panels earlier. At that point the college changed the chair of the review panel.

  131. What kind of action was this? It was not a judicial review was it?
  (Professor Melville) No, no. I tried to clarify. It was not a judicial review issue. Let me state carefully again. They threatened the Funding Council with judicial review just before Christmas on the issue of the content of the report and that they might well stay the report unless due consideration was given to their comments. As far as the college was concerned, they simply went back to the High Court to stay the hand of the college in the disciplinary process on two occasions: the first successfully in order to change the chairman of the disciplinary panel; the second unsuccessfully when the college proposed to proceed in their absence with the disciplinary hearing.

  132. They were seeking injunctions, they were not judicially reviewing the decisions.
  (Professor Melville) Yes.

  133. Who paid for that? The college had no input into paying for that did it?
  (Professor Melville) No; as far as I understand, not. It was paid for, as I understand it, by the insurance policies which the college principal and vice-principal had, their professional indemnity.

  134. Their professional indemnity insurance. Was the premium paid for by the college?
  (Professor Melville) I think you would have to check that but it would be most unusual if it were. My understanding is that both the principal and the vice-principal are members of the Association of Principals of Colleges and one of the main purposes of this membership is to provide this kind of legal support.

  135. They effectively got their trade union to pay for it, did they?
  (Professor Melville) Yes[12].

  136. That is helpful. It seems to me, if we look at the back of the NAO report, I recall even in my short time on this Committee having dealt with, it seems, lots of issues to do with the Further Education Funding Council, and the Higher Education Funding Council. So I turned to appendix 3 in the report and saw a list of NAO reports on governance issues in the further and higher education sectors on page 52. Following it there are five full pages in appendix 4, in very small type I might add, of conclusions and recommendations from previous reports relevant to this report in respect of governance and management in higher and further education. These reports go back to 1994-95 and have been going on regularly since. If we read in detail some of the PAC concerns from the past, virtually all of them are directly relevant to Halton College. It seems to me that there has been an obvious problem with college governance for some time, yet we have you back here again with another serious problem of fraud and mismanagement. How many more times are you going to have to come back before we get this straight?
  (Mr Bichard) What we have tried to do is to follow up every recommendation that this Committee has made on specific issues: Huddersfield, Portsmouth, Southampton Institute. However, as I said earlier, I do think that the issues around Halton and Bilston are of a different order. I do not believe that the previous hearings showed that we had a deep-seated, wide-ranging, fundamental problem. We had in place audit arrangements that we believed by and large were working, external, internal, inspection by the FEFC, a whole range of controls. What Halton and Bilston have shown is that they are capable of being flaunted. They are flawed and therefore we are putting in place now a new range of initiatives which I think will stop this happening again. The sadness is—and I will only say it the second time—that across the sector generally there is an enormous amount of good work going on and I do not believe that there is this kind of impropriety, I really do not.

  137. The principalship here, as they appear to call themselves, were clearly out to have a good time and make what money they could out of the public purse. It does seem to me that it was fairly obvious on the ground. This matter finally came to light by way of a whistleblower and the way in which these people were behaving must have been well known in the college generally. Why, with all these arrangements, was it not possible to pick up these problems before?
  (Mr Taylorson) It is true to say that the principal's was a fairly determined and heavyweight approach. I am quite sure that a lot of the staff under his control were frightened of saying anything which might have prejudiced their own jobs. A number of people had in fact lost their jobs at that time, it now turns out because they either did not agree with the principal's way of running things, but in general we were told that they lost their jobs because they were not up to the job they were meant to be doing. This has now been changed and we have made other people senior postholders which gives them the opportunity of telling the board directly when anything like that is going on. But it did not happen at the time and it was a weakness which I am sure applies in other colleges as well as Halton.
  (Mr Bichard) Inevitably in these sorts of circumstances one must depend to some extent on the quality of your internal audit and that clearly was not working. As I have said on another occasion to Mr Taylorson, if I stay in the Dorchester tomorrow night, then my internal auditor and Director of Finance will be in to see me by the end of the week at the latest to ask me what I have done and to present me with the invoice. I am no shrinking violet either but they will do that and that is the kind of control on this kind of activity which one expects in any well run organisation. It clearly was not present and that is why we need to divorce external and internal audit and why we are reviewing the policy of internal audit across colleges and in the whole of the country.

  138. Do you think the fact that a number of auditors in the field have refused to show your own people their working documents indicates that there might be a more widespread problem and that the sector is seen as an easy job which need not be done with rigour?
  (Professor Melville) I do not believe that is the case, in fact the situation has been remedied now and the audit firms have agreed to show us their working papers.

  139. Since the beginning of the hearing? That is superb.
  (Professor Melville) No, you will see this referred to in the NAO report and as a result we were able to begin our reviews of the external auditors' work. We have looked at a number already last year and we expect to look at 55 college external audit pieces of work in the forthcoming year. The matter has been resolved with the assistance of the National Audit Office. It was a difficult issue.

  140. Are you satisfied that this kind of sloppiness in the internal and external audit is not a common theme in the sector and is not going to be shown to be the case elsewhere in other colleges?
  (Professor Melville) Our reviews indicate, and it is very clear in the report, that there is a problem relating to external audit in particular and that is why we have welcomed the proposal which the Government has made that the Funding Council take over this specific function of the audit of student number claims in order that we can be the client, we the Funding Council can ensure quality and we can in fact carry out those audits ourselves or we can actually use others of our agents in that process.

  141. Do you think it right to allow colleges to have the same person as internal and external auditors? I know you are going to put a stop to that.
  (Professor Melville) Yes. In the light of the findings here it is important to indicate not only simply the propriety of the matter but rather that it has led to one or two situations once again you would call reprehensible practice. The NAO report indicates that in some cases the same partners were involved in the process. Although Chinese walls are claimed, they are not always apparent and separating them is a means whereby we can ensure they are built in.

  142. I just wonder why on earth the principal and deputy principal were not sacked immediately summarily once the facts of their abuse of public money were found. Why were extensive disciplinary proceedings necessary? Summary dismissal is quite normal for those employees who dip their hands in the till. Why were they not just sacked?
  (Mr Bolton) It was difficult to sustain an allegation of that nature. They were not dipping their hands in the till, they were claiming all the time that all the overseas trips and so on were genuine college business as part of the international vision for the college. They regarded themselves as an indivisible principalship and therefore they both felt the need to go away together and it was difficult to sustain the claim that there had been any suggestion of fraud or impropriety and indeed that has been the case in terms of fraud to date. The police have been informed but there has been no suggestion that it is a matter of deliberate fraud in the sense of putting their hands in the till for personal gain.

  143. I find that a remarkable statement to make. May I finally ask the Comptroller and Auditor General whether he is satisfied that the measures being suggested by Mr Bichard and by the FEFC are adequate to deal with potential future problems of this nature. We have seen many problems in this field over the last few years. Are you satisfied that the response which we have heard of today is sufficient to mean that we will not all have to come back on a regular basis to hear more horror stories?
  (Sir John Bourn) The measures which you have heard are sufficient to deal with the kind of problems which were experienced. I would not rule out that there are not some cases still in the system which relate to times past which further whistleblowers, possibly activated by this hearing, will start to surface. I do not rule out the fact that I may bring before the Committee some further examples of this kind of financial mismanagement. However, the kind of regime which Mr Bichard outlines and which Profesor Melville talks about should be sufficient to provide the kind of guarantees. I thought Mr Bichard made a very good point. It is when you have two or three things which are not right that you find these difficulties occurring. As he said, strong principal, weak audit, governors in the pocket of the principal, it is when you get a number of these things coming together. Professor Melville and his teams will continue to have to look in their inspections for indications of this kind of thing happening. However good your regime is, if you get instances of matters coming together, it is only by knowing the colleges, knowing the people, that you get sufficient early warning to stop it getting totally out of hand. I see the measures as the right ones, but a great deal will still rest on the work of the Funding Council to know all its 430 clients very well.

  144. A point of clarification, Professor Melville. In answer to Maria Eagle you were saying that the matter of access to auditors' records is now resolved. Could I just be very clear? When precisely was it resolved?
  (Professor Melville) I can check the precise date. It is referred to in the report. It was resolved in the middle of last year. We were able to conduct some of the reviews last year and we shall be conducting more than 50 this year.

  145. Is that with the specific auditors here or all of the auditors?
  (Professor Melville) All of the auditors. In fact we have a systematic programme based on the college audit, so it will be the same auditors several times.

  146. One thing I omitted to ask during my 15 minutes was what was the actual cost of sorting this mess out, basically the cost of investigations, including the financial investigations? Could you tell us the cost, including also the salary of the principal and vice-principal?
  (Professor Melville) As far as the Funding Council is concerned, the cost associated with the forensic auditors' investigation which we commissioned and also our legal costs, is expected to total £300,000.
  (Mr Bolton) The college's costs for KPMG are just under £80,000 and the legal costs are £95,000 for both the investigation and the disciplinary hearings. The salaries of the principal and vice-principal were £105,000 for the principal, excluding superannuation and national insurance, and £90,000.

  147. We had a piece of new information from you in evidence when you said that the two people at the centre of this report had tendered their resignations and I assume those resignations were accepted. How many months had they had on what salary?
  (Mr Bolton) On full pay each had 11 months.

  148. So you paid them nearly £200,000 between them in salaries while they have been suspended.
  (Mr Bolton) Yes.

  149. What about the redundancy packages? Might their miraculous medical recovery not relate to the fact that if you had dismissed them, and I recognise it might have been difficult to do so, might not their redundancy package have been somewhat diminished as compared with if they resigned?
  (Mr Bolton) In fact neither of the two people, the principal and vice-principal, who resigned are entitled to redundancy packages. It is only people who are required to face redundancy by the college for the needs of the college, who can be offered redundancy compensation. These two resigned and the college only accepted their resignation on the grounds that it was with immediate effect, that is no period of notice, and therefore the only payment made to the principal and vice-principal will be contractual obligations of 22 days' holiday which amounts to about £5,600 in the case of the principal and £4,500 in the case of the vice-principal. That is the sum of all payments made to them.

  150. That is good news. The total cost has been around £200,000 while they suffered from stress for 11 months.
  (Mr Bolton) Yes.

  151. A couple of points of clarification and information. Mr Bichard you made a point of distinguishing, as I understood it, between colleges with financial control difficulties and those with more serious problems like the one we have been discussing today. As the Comptroller and Auditor General intimated, the method of dealing with fraud, certainly in the private sector and in most other sectors is to have a series of systems which effectively require collusion for fraud to come about, collusion between the controllers and the people who actually initiate the fraud. Could you let the Committee have a list of colleges where you think the financial controls are weak? You may not think they have problems but it would be worthwhile us knowing how many there are.
  (Mr Bichard) Yes[13].

.  (Professor Melville) Yes.

  152. Second point, I did not get clear from the witnesses whether we were going to be informed when you received your advice on the legal position of recoveries from the principal and vice-principal. Can we be notified when you have that legal advice, please?
  (Mr Bolton) Yes[14].

  153. When the auditors' position is reviewed at the end of July we may well have published by then butif we have not, could you also notify us of that as well?
  (Professor Melville) Yes, we will.
  (Mr Bichard) Would it be helpful later in the week, when Ministers make an announcement listing the various initiatives I have talked about today, if we let you have a copy of that as well for the Committee?

[15] May I just say that I understand it has been difficult today, this is a very difficult problem. I thank you all for giving your evidence clearly and succinctly. Thank you very much indeed.

2   Note by Witness: The ISR, was in existence from 1994-95, not 1995-96. Back

3   Note: See Evidence, Appendix 4, page 21 (PAC 98-99/210). Back

4   Note by Witness: It was Professor Melville's view that it should have been done, not should be done. Back

5   Note by Witness: The positive plans put in place are by the Acting Principal, not the new Principal, as stated. Back

6   Note by Witness: The investigation was carried out by the Further Education Funding Council and Robson Rhodes, not Halton College and KPMG, as stated. Back

7   Note: See Evidence, Appendix 1, page 18 (PAC 98-99/203). Back

8   Note by Witness: The Board being the Further Education Funding Council. Back

9   Note by Witness: Sentence should be amended to read "The answer should be no, and we shall be taking action to ensure that it is not necessary in future". Back

10   Note by Witness: When an individual is suspended on pay, action will be taken to allow limitations to the period. Back

11   Note by Witness: It will not be for this year alone, but from this year that notes to the accounts will be introduced. Back

12   Note: But see Evidence, Appendix 5, page 28 (PAC 98-99/234), see also Evidence, Appendix 6, page 000 (PAC 98-99). Back

13   Note: See Evidence, Appendix 2, page 18 (PAC 98-99/204) and Evidence, Appendix 5, page 28 (PAC 98-99/234) Back

14   Note: See Evidence, Appendix 5, page 28 (PAC 98-99/234). Back

15   Note: See Evidence, Appendix 3, pages 19-20. Back
 

APPENDIX 1
 

  The Council could not gain access to the following audit firms' working papers in 1998, pending agreement on the policies surrounding that access:

—  KPMG

—  Coopers and Lybrand

—  Price Waterhouse (access was available until the merger of Price Waterhouse with Coopers and Lybrand, after which it was refused)

—  Robson Rhodes (cooperated for part of the year only)

—  Deloitte and Touche (access was granted by some regional offices of Deloitte and Touche and refused by others)

  In November 1998, agreement was reached with the Institute of Chartered Accountants for England and Wales, on behalf of the accountancy firms, on the principles which govern the Council's access to external auditors' working papers.

  All the firms above are working currently within the sector.

Further Education Funding Council

1 May 1999

APPENDIX 2

Q.151

1997-98 inspections

  Stourbridge College

  North Derbyshire Tertiary College

  Dewsbury College

  Ludlow College

  Hadlow College

  Melton Mowbray College

  Kirkley Hall College

  Hartlepool Sixth Form College

1998-99 inspections

  Bolton College

  Suffolk College

  East Yorkshire College of Further Education

  Broomfield College

  Matthew Boulton College of Further and Higher Education

  West Thames College

  Wirral Community College

  Keighley College

Further Education Funding Council

1 June 1999
 

APPENDIX 3

  Q.153  Education and Employment Minister Tessa Blackstone today announced a crackdown on incompetence and financial mismanagement in further education colleges.

  This follows critical reports on Bilston, Halton and Wirral Colleges by the Further Education Funding Council. At each of the colleges the governing bodies are being replaced; today Baroness Blackstone appointed a new governing body for Bilston College. New measures announced today will improve college governing bodies, management and audit.

  Baroness Blackstone said:

"Communities must be able to rely on their local FE colleges to provide the basis for lifelong learning, so crucial to our education agenda. There are many examples of excellent colleges across the country.

"However, these reports show a disturbing pattern of weak governance and poor financial control. We cannot allow a small minority to be a blot on the whole sector. We have already acted to tackle the problems at Halton and Wirral. Today we have appointed a new governing body for Bilston College.

"The people of Bilston have been let down badly. The college lost sight of its responsibilities to address the needs of its local community. Educational standards were allowed to deteriorate rapidly to the worst in the FE sector.

"The former governors and senior managers bear responsibility for the college's failure, to the point that it no longer has a future as a separate college. We are looking to the FEFC to give us advice as soon as possible on how best to give the college the fresh start it needs and that the people of Wolverhampton deserve; this might include merger with another local college.

"Together with FEFC we have already taken a number of steps to improve governing bodies and tackle poor standards. But more needs to be done. We will:

—  toughen audits, to ensure that abuse of financial systems is detected;

—  provide new powers for the FEFC to intervene quickly and effectively when it believes there is cause for concern at a college;

—  raise standards of conduct of all governing bodies to the levels of the best; and

—  require anyone who wishes to become a principal of an FE college to be properly qualified.

"David Blunkett and I are determined that the very serious and fundamental weaknesses shown by some colleges must never be repeated. And no-one should have any doubt that where there is evidence of criminal misuse of public funds, we and FEFC will not hesitate to refer matters to the police."

NOTES TO EDITORS

  1.  THE NEW FINANCIAL AND INSPECTION MEASURES TO BE INTRODUCED ARE THAT:

—  college Governing bodies must receive a report at least termly that reviews the college's financial position;

—  colleges will not be able to employ the same firm for both internal and external audit;

—  all colleges must disclose in their annual accounts all expenditure on foreign travel and hospitality;

—  all Audit Committees must include at least one person—whether a Governor or not—with relevant financial/audit expertise;

—  all college student number external audit work—including specialist audits; where there are serious concerns—will be the responsibility of the FEFC or its contractor;

—  the audit arrangements for colleges will include a requirement for the audit of and compliance with expenses regulations (including arrangements for independent checks on senior staff expenses) and a report to the FEFC on those which are considered excessive; and

—  in the context of future post-16 proposals to be published this summer, the Government will consider strengthening of the inspection process, and its separation from funding functions.

  2.  New governing bodies measures to be introduced are that:

—  FEFC will be able to nominate up to two Governors to any college Board when it considers it to be necessary;

—  FEFC will be able to require observers/assessors to attend Governing Body meetings when it considers it to be necessary;

—  each college must review annually its decision-making processes and such reviews must be recorded in the minutes;

—  all Governors should within six months of appointment participate in appropriate training and development specified by the FEFC, to include modules on financial and other key responsibilities;

—  all Governors should receive a proper induction pack together with a copy of the college's instrument and articles; and

—  Search Committees of Governing Bodies should evaluate the contribution made by existing individual Governors before proposing their reappointment, especially after two terms of office.

  3.  The report on Bilston Community College was published in February and is available from FEFC. A report on the future of Bilston Community College was published at the end of March 1999 and is also available from FEFC. The governing body of Bilston College resigned on Friday. An independent Search Committee chaired by the Vice-Chancellor of Wolverhampton University, Professor John Brookes, has recommended new members for the governing body. Eight were appointed today and further appointments will be made shortly by the new governing body. FEFC is currently consulting with Wulfrun College in Wolverhampton about future arrangements for further education in the Bilston area following the closure of Bilston. One option is for the two colleges to merge under the management of Wulfrun College. The FEFC is keeping the police informed throughout their investigations.

  4.  An NAO report "Investigation of alleged irregularities at Halton College" was published on 15 April. The parallel FEFC report published on 15 April on alleged financial irregularities at Halton College is available from FEFC. Halton College has to pay back to the FEFC over £10 million. In addition, the reports by the FEFC and the NAO highlighted lack of control by Governors over purchasing and visits. The Governors will stand down in the Summer and be replaced by new Governors. The Principal and Deputy principal resigned in April 1999 after being suspended since May 1998.

  5.  The inspection report on Wirral Metropolitan College was published on 27 April and is available from FEFC. The college has debts of over £9 million and some of the worst academic results in the sector. In December 1998 the FEFC warned the Governors that it had no confidence in the ability of the Governors to deliver a recovery plan. In January 1999, the Principal announced that she was retiring early, and all but one of the Governors resigned. The Secretary of State has appointed new Governors, who have recently appointed a new Principal. The new Governors are working closely with the FEFC to repay debts and improve academic performance.

  6.  There will also be a qualification that will be a pre-requisite for appoinment as a college principal. This new qualification will be no less rigorous than the NVQH for headteachers in schools. The restriction (which applies currently for senior staff only) that suspension must be on full pay will be removed.

Department for Education and Employment

28 April 1999

APPENDIX 4

  I attach a copy of my report into those colleges that I referred to at the Public Accounts Committee on 26 April 1999.

  In summary the Council has undertaken a comprehensive and detailed analysis of the information it holds and has identified six colleges where the similarities to Halton College are sufficiently marked to justify further review. Of these six, three are already the subject of special reviews, leaving three colleges which will now be subject to further review.

  The three colleges subject to further review have been informed of this by letter. Council staff are finalising a further detailed anlaysis of the provision of each of these colleges in comparison with usual practice in the sector.

  The next stage will be to share with each college the results of this further work and to invite the college to meet with Council staff to consider the implications for its funding claims. Depending upon the outcome of this stage, the Council may ask the college to participate with the Council in a joint review of its funding claims.

David Melville
 

Chief Executive

4 June 1999

INTRODUCTION

  1.  This report fufils my statement to the Committee at its hearing of 26 April 1999 to produce a report on the colleges I reported we had identified as exhibiting similar growth characteristics to Halton College.

BACKGROUND

  2.  My report on Halton College[15] stated in Part 2 under the heading "Lessons for the Council and Action Proposed" at pargraph 28, bullet point 4:

"Council officers are undertaking work focusing on colleges which appear to have similar growth characteristics to Halton College, that is rapid growth of provision largely attributable to franchised provision, where much of this provision is out of the lcoal catchment area. Any such colleges which have not been subject to a recent inspection or a special study, will have further reviews of their funding claims undertaken. If any concerns arise, the Council will require the college to set up a joint review with the Council."

  3.  The report by the comptroller and Auditor General (the NAO report)[16] stated at paragraph 3.24:

"In addition, the Funding Council is focusing on colleges with similar growth characteristics to Halton College, that is with rapid growth of provision largely attributable to franchised provision, where much of this provision is for out of local catchment area. The funding returns of any such colleges that have not recently been inspected or reviewed in special studies will be subject to a detailed review. If any significant concerns arise, the Funding Council will consider requiring colleges to set up joint reviews with the Funding Council along the lines of that undertaken at Halton College.

  4.  At the hearing of the Committee of Public Accounts on 26th April 1999, I stated that:

"There are round about 10 colleges which are very similar to Halton in a number of respects, in terms of their dependence on franchising, their distance provision, using assessment of prior learning and so on . . . relatively unusual methods of provision."

CHARACTERISTICS OF HALTON'S PROFILE

Rapid Growth

  5.  Between 1993-94 (the first year of incorporation) and 1996-97, a period of four years, Halton College increased its funding units by 241 per cent.

  6.  Table 1 below shows the top 20 growers during the first four years of incorporation. This period includes the availability of the demand led element (DLE), which stimulated unrestricted growth. It was ended after 1996-97.

  *  Since renamed New College, Nottingham, following a merger with Basford Hall and High Pavement colleges.

 FRANCHISING

  7.  Halton's growth can largely be explained in terms of its use of franchised provision.

  8.  Table 2 below shows the top 20 franchising colleges by the percentage of their total units in 1996-97 delivered through franchising. Their growth ranking is also shown, in bold if they were in the top 20.

DISTANCE FRANCHISING

  11.  Halton College was probably the first college to utilise extensive franchising at a distance from the college. Indeed, it first came to national prominence through the Radio 4 programme "File on Four" broadcast in July 1995, which described their franchising nationwide with, amongst others, Tesco's and Sainsbury's.

  12.  There are two measures of distance franchising. The first defines a catchment area for a college in terms of the area from which it recruits the bulk of its direct provision students and the out of catchment area franchising is, therefore, readily identified. Table 3 below shows the top 20 distance franchisers in 1997-98 by catchment area—position in the rank order for rapidity of growth and rank in terms of per cent franchising dependence are also shown.

*  since renamed City College, Birmingham, as part of a merger with East Birmingham College.

  13.  A second method for illustrating distance provision is to look at the number of districts (defined by Local Authority boundaries) in England in which a college makes provision. Table 5 below shows the top 20 colleges and their comparative ranking in previous tables.

SUMMARY OF FINDINGS AGAINST FIRST THREE CRITERIA

  14.  Based on the above data the selection criterion for colleges similar to Halton is that they rank in the top 20 for at least two of the four factors, and at least one of these is in the top 10.

  15.  This gives a list of 13 colleges, plus Halton, as shown in table 5:

FURTHER CHECKS

  16.  A number of other features of concern which were evident at Halton College were next compared to see if the 13 colleges which matched Halton's growth and distant franchising profile also had such features.

  17.  The results are summarised in table 6 below and discussed in the following sections.

*  APL: accreditation of prior learning. Only 36 colleges used this form of delivery of provision in 1997-98, so many colleges were not ranked on this factor.

One Day Provision

  18.  The minimum number of guided learning hours for a course to be eligible for Council funding is nine. Some courses in FE have traditionally been delivered in a three session day and therefore have nine guided leaning hours duration. However, concerns about the growth of such provision has lead to a request of colleges and external auditors to check on the eligibility of one day courses. The 1998-99 audit guidance due to be issued shortly, asks external auditors to make particular checks on this provision.

  19.  As can be seen from table 6, none of the 13 colleges is ranked highly on this particular factor.

National Vocational Qualifications
 

  20.  A feature of Halton's provision was the relatively high proportion of National Vocational Qualifications (NVQs) delivered by the college. Because NVQs are competence based and the assessment of competence has to be undertaken in the workplace (or a simulated workplace environment) the application of the Council's guided learning hour definition can be problematic compared with traditional classroom based delivery.

  21.  Of the 13 colleges, Stafford and Clarendon are both ranked in the top 20 colleges.

Accreditation of Prior Learning (APL)

  22.  Halton College used APL to evade the loadband maximum of 4 on workplace-delivery NVQs.

  22.  None of the 13 colleges have used APL. There is only one other college in the sector with APL provision on the same scale as Halton and this is being investigated as part of a separate exercise.

Open and Distance Learning
 

  23.  New provision through innovative modes of delivery is encouraged by the Council to show responsiveness to demand and widen participation. However, such provision can carry a higher risk of misclaiming if the Council's guidance is not applied prudently and reasonably.

  24.  The Open University has been the "brand leader" in such delivery but the establishment of the University for Industry (UfI) will undoubtedly stimulate growth in this mode of delivery.

  25.  The Council has established a sub-group of its Tariff Advisory Committee (TAC) to assess the funding values that should attach to such provision. The college includes, in addition to sector representatives, colleagues from the Open University and the UfI.

  26.  Of the 13 colleges two (Mid-Kent and Bilston) are ranked in the top 20 for this mode of provision.

Loadbanded Qualifications

  27.  Halton College used a relatively high percentage of loadbanded qualifications. Where a college delivers a loadbanded qualification then the amount of funding it can claim is dependent upon the number of guided learning hours it records in its individualised student record (ISR) data. In contrast, for individually listed qualifications, which form the great majority of qualifications for which the Council funds provision, the amount of funding is determined by the tariff and is not at the discretion of the college.

  28.  Of the 13 colleges three (Bilston, Barnsley and Handsworth) were ranked in the top 20 for their use of loadbanded qualifications.

 SUMMARY OF FINDING AGAINST ADDITIONAL CRITERIA

  29.  Six of the 13 colleges were ranked in the top 20 on at least one of the further factors. Several were ranked very highly, for example Stafford College made the greatest use of NVQs and Mid-Kent College made the greatest use of open and distance learning. In contrast, the other colleges were generally ranked well below the top 20 on all five factors. For example, Barking College had a highest rank of 121.

  30.  Based on these data colleges were excluded unless they were ranked in the top 20 on at least one of the further factors. This reduces the list of colleges for further review to six and these are shown in table 7.

  31.  In may report I indicated that colleges would be the subject of further review if they had not been subject to a recent inspection or a special study. As can be seen from table 7, Bilston, Stafford and Handsworth are the subject of special reviews and so do not require further review as part of this process. None of the other three colleges has been inspected or had an audit visit within the last two years.

OTHER INVESTIGATIONS

Scottish, Welsh and Northern Irish Students
 

  32.  In paragraph 28 of part two of my report I indicated that I had asked the Council's chief statistician to undertake further checks on colleges with 100 or more Scottish, Welsh or Northern Irish students. None of the six colleges were involved in that review.

  33.  The review has confirmed that the colleges with 100 or more Scottish, Welsh or Northern Irish students have interpreted Council guidance correctly. Two colleges have made minor adjustments to their funding claim because of recording errors but otherwise the presence of these students can be explained by the fact that the college is close to the Scottish or Welsh border; or because the college was making specialist provision not available outside England; or because the college was making provision for a national organisation and it would have been unreasonable for the college to differentiate the minority of Scottish, Welsh or Northern Irish students involved.

Reclassification of Franchising
 

  34.  In paragraph 28 of my report I also referred to colleges which appear to have reclassified franchised provision between 1996-97 and 1997-98, thereby increasing their funding allocation for 1998-99. Halton College made such a reclassification.

  35.  As indicated in my report, Council staff are undertaking further checks and I will make a separate report on this subject. However, there is some overlap, since the data for Barnsley, Clarendon and Mid-Kent colleges indicate that they may have undertaken reclassification. This will be followed up with these colleges as the next stage of this review.

  36.  The investigations so far indicate that only one college outside the scope of this report may have gained a financial advantage in 1998-99 by reclassifying franchised provision in 1997-98 and this college has been asked for an explanation.

SUMMARY OF FINDINGS

  37.  The Council has undertaken a comprehensive and detailed analysis of the information it holds and has identified six colleges where the similarities to Halton College are sufficiently marked to justify further review. Of these six, three are already the subject of special reviews, leaving three colleges which will now be subject to further review.

  38.  The three colleges subject to further review have been informed of this by letter. Council staff are finalising a further detailed analysis of the provision of each of these colleges in comparison with usual practice in the sector.

  39.  The next stage will be to share with each college the results of this further work and to invite the college to meet with Council staff to consider the implications for its funding claims. Depending upon the outcome of this stage, the Council may ask the college to participate with the Council in a joint review of its funding claims.

The Further Education Funding Council

4 June 1999

15   Halton College-A Report of the Investigation into Alleged Financial Irregularities at Halton College April 1999. Back

16   Investigation of alleged irregularities at Halton College 15 April 1999. Back
 

APPENDIX 5

Q.135  The Principalship's legal costs

  The Corporate Board of Halton College agreed to pay legal costs for the Principalship (Principal and Deputy Principal) at their meetings in April and June 1998. This was to a capped limit of £12,000. In taking this decision, the Board realised that the Principal would be instrumental in providing evidence and a response for the college to the original 14 allegations. However, as some of those allegations were specifically aimed at the Principalship's activities the Board appreciated that the college's legal advisers could not also advise the Principalship on these issues. The Board was quite clear that there may be a conflict of interests at some point in the future. It was, therefore, not appropriate for the Principalship to access the same solicitors as the Board. Therefore, Irwin Mitchell advised the Board and Dibb Lupton Alsop advised the Principalship. It should be noted that the £12,000 was only paid on receipt of appropriate invoices and breakdown of charges, on an hourly basis, from the appointed firm.[17]

  The Clerk to the Board indicated at that time that he was of the opinion that the college insurance would cover such payments to the Principalship and that this avenue would be pursued. The college insurers indicated in July 1998 that they could only consider the claim once the reports were made availabe to them. This was done as soon as the reports were published this year (April 1999) and continued dialogue has followed with the insurers to reach a conclusion quickly. Confirmation has now been received from the college insurers that the £12,000 will be met through the college insurance.

Q.152  Recovery of monies from the Principalship

  The Board discussed this issue at length. Members were particularly concerned about the payment of performance elements to the Principal and Vice-principal on the basis of information given at the time but which now needs substantial revision in the light of recent investigations. The college sought and obtained legal advice on this issue, some time ago. At that time, it was deemed to be inadvisable to pursue any action as this could have precipitated their resignation and led to a subsequent claim for compensation. It would also have further complicated a complex disciplinary process.

  Now that the Principal and Vice-Principal have resigned, consideration has been given to the pursuit of claims for compensation as a result of breach of contractual duties, fiduciary duties and other duties of trust. Whilst the possibility of bringing such claims exists, any action would not be straightforward in terms of legal issues and quantification of the college's claims. Legal action could well prove so costly that proceedings quickly become uneconomic, particularly with regard to potential limited resources available to satisfy any damages or costs obtained by the college. The subject matter of this dispute is complex and would not lend itself to a speedy and inexpensive resolution. The college's legal advisers state that, having regard to the complexity, cost and delay that would result from such legal proceedings, such an action is likely quickly to become uneconomic and is therefore inadvisable.

Q.153  Status of Auditors

  The Board of Governors received a report from the Chairman of the Audit Commitee (5 May 1999) to the effect that he had sought advice from the FEFC who had indicated that this was not a straightforward process and would need to be considered carefully by the college. A meeting was therefore arranged with the college's legal advisers.

  A meeting of the Board scheduled for 15th May was unfortunately inquorate on the day and was therefore rearranged for 11 June. At this meeting, the Board received written legal advice. The advice indicated that it would be necessary to show that the Auditors breaches of duty caused a loss and thereafter the amount of damage attributable to that breach. The assessment of loss would be a complex issue and expert accountancy evidence would be required to determine the precise loss or damage suffered.

  Issues raised in connection with the assessment of loss include:

(a)  The fact that the FEFC will be paid out of cash reserves accumulated by the college and therefore proof of actual financial loss is likely to be difficult.

(b)  Loss or damage as a result of the auditors' breaches. If the college has contributed to the loss through the way it has managed its courses or financial practices and educational policies, then this will clearly be mitigation for the loss resulting from audit breaches.

(c)  The original brief of the auditors will need to be looked at carefuly in terms of its rigour and scope, together with terms of engagement and provisions limiting liability.

(d)  The auditors may argue that the FEFC guidance was so unclear or contradictory that they are not to be held responsible for shortcomings undertaken by them. Alternatively, the auditors may argue that the college is guilty of contributory negligence through its practices in compiling and submitting funding claims.

  The Board was advised that any action against the auditors may be expected to be lengthy, costly and vigorously defended. Preliminary investigation into the viability of such an action has been estimated to cost £50,000 plus VAT in legal fees and £75,000 to £100,000 plus VAT in accountancy fees. Clearly, there would also be the involvement of considerable senior management time in assisting with that investigation, with a potential degree of disrupton to the college's attempts towards recovery.

  After considering this advice carefully, the Board decided that it would not be a prudent use of public funds to risk large amounts of money in litigation against limited prospects of small financial rewards.

  The contracts for both the college's internal and external auditors come up for renewal in July and this issue will be a priority for the new Corporate Board.

Halton College

25 June 1999
 

17   Note by Witness: The college has recently received, from its Insurance Brokers in respect of the legal fees incurred by the former Principal and Deputy Principal, a cheque for £12,000. Back

APPENDIX 6

  Part of my evidence to the Public Accounts Committee (PAC) on the Comptroller and Auditor General's report Investigation of Alleged Irregularities at Halton College concerned the legal fees of the former principal and the deputy principal.

  During the hearing on 26 April 1999, I was asked by Maria Eagle whether or not Halton College had paid for the former principal and the deputy principal to seek a judicial review toward the end of 1998 (paragraphs 128-135 of the PAC transcript). In response, I stated that it was my understanding that the cost had not been met by Halton College, but by the Association of Principals of Colleges.

  My purpose in writing to you now is to clarify the background to an article which PAC members may have read in the Times Educational Supplement on 18 June 1999[18], in which it was alleged that the college had failed to inform the PAC that they had paid £12,000 of the former principal's and deputy principal's legal fees. The facts of the matter are:

—  on 20 April 1998, I met with the chair and clerk of the Board of Halton College and advised them that, following the 2 April 1998 investigation by Council staff and the National Audit Office, a further detailed investigation was warranted. I further advised the chair that the Board should suspend the principal and deputy principal immediately;

—  at its meeting on 22 April 1998, the Board confirmed a decision taken by the then chairman to allow the principal and the deputy principal to seek legal advice on their position as Board members responding to the allegations. The Board chose not to suspend the principal and deputy principal;

—  as soon as the Council became aware that legal advice had been paid for by the college, I advised the Board Chairman that this was inappropriate;

—  the legal advice was received in April/May 1998 and invoiced in June 1998. It is the Council's understanding that the college set a maximum of £10,000, subsequently increased to £12,000 to pay for legal advice for the then principal and deputy principal;

—  from this point we understand, on the basis of information supplied by the college, that the costs were met by the Association of Principals of Colleges. The college indicated that it believed that the legal fees incurred would be met by the college's insurers through governors' and officers' liability insurance cover. The college has since confirmed that the £12,000 will be met through the college's insurance;

—  in August 1998, the Council ensured that the college confirmed that no further legal fees had been paid.

Chief Executive Higher Education Funding Council

2 July 1999

18   Not printed. Back