The Investigation of Alleged Irregularities at Halton College

The Investigation of Alleged Irregularities at Halton
College - HC 413

03/09/1999

INTRODUCTION AND SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS

1. Halton College (the College) based in Widnes, has become one of the largest of England's 435 further education colleges. Since incorporation in 1993-94, it has grown considerably and has been a leader in the field of work-based training, much of which has been provided on a franchised basis. For the 1997-98 academic year, it received £14.9 million grant from the Department for Education and Employment (the Department) via the Further Education Funding Council for England (the Funding Council). In 1996-97 it realised a surplus of £2.8 million on a turnover of about £22 million.

2. Following correspondence from a member of the public, copied to the Comptroller and Auditor General, the Funding Council investigated fourteen allegations about extravagant and irresponsible use of public funds at Halton College. Although the majority of the allegations were unsubstantiated, the Funding Council found inadequacies in the stewardship of public funds and in the governors' supervision of the College's activities. A detailed joint investigation by the Funding Council and the College also found that the College had claimed almost £14 million more grant from the Funding Council than was justified.

3. The National Audit Office carried out their own investigation, drawing on work done both by the Funding Council and the College, and based on a survey of about a quarter of all further education colleges concluded that some of the weaknesses in control at Halton College might exist elsewhere.

4. The Comptroller and Auditor General and the Further Education Funding Council published their reports on 15 April 1999. On the same day, the Principal and the Deputy Principal of the College resigned. The Governors of the College plan to resign in July 1999.

5. On the basis of these reports, the Committee took evidence from the Department, the Funding Council, the Acting Principal and the Chairman of the Board of Halton College on:

what went wrong at the College and why; and

what is being done to ensure that similar problems have not occurred elsewhere.

6. During our hearing the Department told us about new measures designed to tackle poor financial control and governance in further education colleges, in the light of Halton College and other cases. These new measures were formally announced on 28 April 1999, two days after we took evidence.

7. Based on our investigation, we draw out two main messages:

a) Overclaims of grant

Halton College was able to claim almost £14 million more in grant from the Funding Council than was justified, despite a range of controls for ensuring the accuracy of funding claims including audit by the College's external auditors. The Funding Council are still investigating six other colleges where overclaims might have arisen. We find it difficult to understand how unjustified claims on this scale could have evaded the financial controls in place, that it has taken so long to finalise the figure at Halton, and that other potential cases are still not resolved. We look to the Funding Council to review again their financial controls and checks over grant claims to ensure that any future overclaims are picked up before payments are made.

b) Governance and management of further education colleges

The problems at Halton arose from a combination of a strong Principal, a weak audit process and a governing body that was not on top of the situation. We have seen similar failings in other colleges. Given that further education colleges receive over £3 billion of public funds each year, we welcome the new measures announced to strengthen governance and audit arrangements throughout further education colleges. These should go some way to prevent further cases and re-establish the credibility of the sector. But we look to the Funding Council to follow through on all of these issues in their cyclical audit and inspection work at colleges.

8. In more detail our conclusions and recommendations are:

What went wrong at Halton College and why

(i) It is highly unsatisfactory that Halton College overclaimed almost £14 million, and that to a large extent these overclaims evaded the financial controls in place at the College and in the Funding Council. One immediate impact of the need to repay this money is that 114 people will lose their jobs, and this will cost the taxpayer £1.8 million. Whilst the Department and the Funding Council have assured us that further education provision to the people of Widnes and Runcorn will be protected, the College will need to go through major and painful changes in order to put the core business of the College onto a sound footing (paragraph 41).

(ii) We are deeply concerned at the extravagant spending particularly on overseas trips by the Principal and Deputy Principal. Apart from the total cost - over £210,000 - and excessive individual expense items, the absence of these two senior managers from the College for almost 12 months over five years can only have added to the management problems there (paragraph 42).

(iii) We agree with the Department that the failings at Halton arose through a combination of a strong-willed principal, a weak audit process and a governing body that was not on top of the situation and some of the members of which were beneficiaries of the excessive overseas travel. In particular, we are surprised that the governors of Halton College met only three or four times a year, and question whether this was sufficient for them to discharge their duties effectively. We are astonished at the proposition that trips by seven governors to Kansas and Miami were necessary to allow them to get to know staff, when this enabled them to meet only 24 of the college's staff (paragraph 43).

(iv) The Principal and Deputy Principal were suspended in May 1998, but it took almost a year before any further disciplinary action was taken against them. During that time, they continued to receive full pay totalling £200,000. We note the intention of the Department to propose limitations to the period over which any future suspensions in the sector on full pay can last (paragraph 44).

(v) We view with serious concern the fact that the Funding Council and the College misled the Committee by agreeing in evidence that the Board of the College had made no contribution to the Principal's and Deputy Principal's legal costs, when in fact they had agreed to pay £12,000. This assertion deprived the Committee of the opportunity to pursue the matter in public. The decision to fund even part of the Principal's and Deputy Principal's legal costs was extraordinary, and could have resulted in the College paying for action being taken against it and the Funding Council. This support may also have contributed to the delays in publication of the Funding Council's report and in taking disciplinary action against the Principal and Deputy Principal, and consequently to the period over which they received full pay while suspended (paragraph 45).

(vi) We note that after taking legal advice, the governing body of the College have decided not to pursue compensation from the Principal and the Deputy Principal because any action could be complex, and could quickly become uneconomic. We believe the Department should reconsider the contractual arrangements which make it too costly to dismiss senior staff (paragraph 46).

(vii) We welcome the steps taken by the Funding Council and the College to improve governance, internal control, management and audit arrangements at Halton College. We look to the Funding Council to monitor the College closely to ensure that these changes work in practice, especially at a time when the College will be going through restructuring, staff reductions, management changes and the appointment of new governors (paragraph 47).

(viii) We note the concerns of the Department, the Funding Council and the College about the performance of the College's internal and external auditors, Deloitte & Touche. We note that the governing body has decided not to take legal action against the auditors in respect of shortcomings in their audit work because their legal advice is that any such action would be complex and costly, and might not succeed. The Board decided that it would not be a prudent use of public funds to risk large amounts of public money, initially £150,000 plus VAT, against the prospect of small financial rewards (paragraph 48).

What is being done to ensure that similar problems have not occurred elsewhere

(ix) We strongly support the positive response of the Department to the problems uncovered at Halton and at Bilston Community College on which the Funding Council has recently published a highly critical report. The newly announced package of improvements to governance and audit arrangements should go some way towards preventing further cases and re-establishing the credibility of the sector (paragraph 68).

(x) We note the steps taken by the Funding Council to identify those colleges with similar features to Halton, who might therefore also be overclaiming public funds. We urge the Council to complete its investigations as soon as possible, and to let us know the outcome (paragraph 69).

(xi) The National Audit Office and the Funding Council found that weaknesses in financial controls at Halton, over procurement and travel expenses, might also exist at many other colleges. While the Funding Council have sent a copy of their report to every college, and drawn their attention to the key weaknesses found, we look to the Funding Council to follow through on all these points in the cyclical audit and inspection work at colleges (paragraph 70).

(xii) We welcome the steps taken by the Funding Council to strengthen the audit of grant claims, and to separate responsibility for internal and external audit. However, we are concerned by the Funding Council's conclusion that internal audit could not be relied on in about a fifth of colleges. We look to them to ensure that internal audit arrangements throughout the sector are rigorous and reliable (paragraph 71).

WHAT WENT WRONG AT HALTON COLLEGE AND WHY

9. In the light of the Comptroller and Auditor General's report, we focussed our examination of what went wrong at Halton College on:

overclaims for funding (paragraphs 10-16);

other financial matters, including procurement and the extent and cost of travel by the Principal and Deputy Principal (paragraphs 17-23);

audit (paragraphs 24-26);

governance (paragraphs 27-29); and

action taken against the Principal and Deputy Principal (paragraphs 30-40).

Overclaims for funding

10. In 1996-97, Halton College had a turnover of £21.8 million. Between 1992-94 and 1996-97, turnover increased by 50 per cent. Over this period, the proportion of the College's income from the Funding Council increased from 61 per cent to 82 per cent. (Figure 1)[1].

Figure 1 : Halton College — Income from the Further Education Funding Council and other sources

11. The National Audit Office reported that during the period 1993-94 to 1997-98, the College had over claimed a substantial amount of grant.[2] The Committee asked the Funding Council how much in total was involved. They said it was £14 million overall (Figure 2).[3]

Source: Further Education Funding Council

12. The Committee asked the Funding Council how the College could have made errors of this scale without being detected, and whether the overclaims would have come to light if it had not been for the whistleblower.[4] The Funding Council told us as a result of routine checks on funding claims it had already held back £953,000 from the College's final funding claim for 1994-95 until the necessary assurance had been received from the College's auditors. For 1996-97, it had undertaken a series of checks on all colleges whose claims for franchised provision had increased by 30 per cent or more over previous years. This had resulted in a further £3.25 million being withheld from Halton College.[5] The Funding Council had asked the College to justify these claims before the whistleblower's letter arrived. Further investigation indicated that the College owed the Funding Council £10.61 million in addition to the £3.25 million withheld from 1996-97.[6]

13. In accordance with the Funding Council's requirements for all colleges, Halton College's auditors - Deloitte & Touche - audited the College's funding claims separately from their work on the financial statements. However, the College told us that the auditors had not picked up the overclaims in their work on the claims for the academic years 1993-94 to 1995-96[7]. (The 1996-97 audit had not been completed at the time the whistleblower's letter was received).

14. The Funding Council accepted that the Principal had misled everybody, not just the internal and external auditors but also the Board.[8] We asked how governing bodies could be expected to identify incorrect or inappropriate claims in these circumstances. The Funding Council had recognised the need for, and would be issuing, guidance relating specifically to the right questions to ask. And the College assured us that in future, funding claims would be explained to the Board before being submitted for payment.[9]

15. We asked what effect repaying the £14 million would have on the ability of the College to provide adequate training and education for the local community of Widnes. The College told us that they were taking steps to balance the books for future years. Regrettably this meant 114 redundancies that mainly fell in the area of dispersed provision or franchising, at a cost in the order of £1.8 million. In addition, 25 posts would be lost through natural wastage. However the core business of the college, of providing education for the local community, could and would continue. The College would now revert to, some might say, its proper role as a community college. As such it was likely to be only two thirds of its previous size. The College foresaw two or three very hard years, but believed that the service could be maintained for the local community.[10]

16. The Funding Council assured us that their main concern was to ensure that provision continued in the Widnes and Runcorn areas, and they were already discussing with the College the period over which the payback of monies would take place. The Funding Council would not destabilise the College, and they were also discussing the College's proposal for a development in Runcorn so that what were extremely positive plans for the college - local provision, focussing on the local population - could be implemented. The Department added that the College should be able to protect the level and quality of service at a lower level of staffing. But it was not surprising that as the College had been over-funded for some considerable time, one should find that it had more staff than it needed.[11]

Other financial matters

17. Eight of the allegations related to the misuse of public funds on the purchase of computer equipment, establishment of College companies, refurbishment of the Principal's offices, "away days", overseas trips, and use of College credit cards. Some of the allegations were unsubstantiated but investigations highlighted significant weaknesses in financial control over procurement and over expenditure on "away days" and foreign visits.[12]

18. One particular area of concern was the extent and cost of travel by the Principal and Deputy Principal. Investigations had found that over a period of five years, they had spent between them nine days short of a whole year out of the College on College business and £210,000 on travel and subsistence. The Principal and Deputy Principal had accompanied each other on almost all trips abroad, so that at these times the two most senior managers had both been absent from the College.

19. The Comptroller and Auditor General noted that the governors' control over these trips had been poor. There had not always been a business justification or an explicit cost-benefit analysis. The Board of Governors had not given prior authorisation for the trips and there appeared to have been no control over the reasonableness of expenditure. However, he also noted that the College had since changed its financial regulations to include the requirement that the Principal's travel claims should be approved by the governors.[13]

20. The Committee asked the College about the oversight of travel and expenses. The Chairman of the Board told us that the scale of this expenditure, and individual examples, were totally indefensible. The Board could not excuse it or explain it.[14] The excesses, such as £1,000 to rent a car and hotel bills in London at £290 per night, were not known to the Board at the time, but were discovered in the subsequent investigation.

21. Some overseas trips involved large numbers of governors, for example 23 governors and

staff attended a conference in Kansas in 1995 and 13 governors and staff attended a conference in Miami in 1998.[15] We asked the College how many governors had attended and why. They told us that five of the 18 governors went to Kansas and two to Miami. As regards the Kansas trip, at the time they had determined to find out more about how American colleges, the community colleges, operated and particularly their ways of raising money other than government funding. They also claimed that the trip was an opportunity for the governors to find out more about the staff whom they saw very infrequently indeed because the governors only met three or four times a year apart from the odd committee meeting and there was no opportunity for them to meet the staff.[16]

22. Another area of concern was the purchase, by the Principal, of etchings at a cost of £31,000. The Funding Council concluded that the procedures that led to it fell short of acceptable minimum standards.[17] The Chairman of the Board told us it had been completely and utterly a surprise to any of the Board, that etchings of this value had been bought. The Board learnt of the cost of the purchase from consultants it had appointed to help investigate the allegations. It came as a total shock, and they could not defend it in any way whatsoever.

23. At the time purchases of this level were within the Principal's delegated spending limit without reference to the Board, but the Board had since set a maximum delegation of £25,000 without reference, and a limit on specific items of £2,500. The Board had also tried to sell the prints to recover the money, but had received unsatisfactory offers of only 50 per cent of the original cost to the College, plus a percentage if the gallery was able to resell the prints for more.[18]

Audit

24. At Halton College, Deloitte & Touche provided both the internal and external audit service.[19] We asked the College whether concerns about funding claims or excessive travel expenses had been drawn to the attention of the governors by the auditors. The Chairman of the Board, who had been Chairman of the College's finance committee from 1997 to 1998, said that the College's claims had been audited over a number of years by professionals, and on no occasion had any doubts been raised. Nor had the auditors raised concerns about excess costs associated with trips. In the Chairman's view, and that of the Funding Council and the Department, the College had been let down by its auditors.The Committee finds it deplorable that Deloitte & Touche and their professional organisation tried to deny the National Audit Office access to information. The Department, however, pointed out that the auditors could not be blamed for everything - it was a combination of a strong principal, a weak audit process and a governing body that was not on top of the situation.[20]

25. We asked whether the College were going to sack the auditors, and whether the Funding Council or the College were planning any action against them for the shortcomings in their audit. The Acting Principal told us that the contract, for both internal and external audit, was due for renewal at the end of July, and in the light of their performance it was unlikely that Deloitte & Touche would be re-engaged. Since the start of this investigation, the Funding Council had called the firm in, and requested specific improvements in the way that they performed their work. Any action against Deloitte & Touche, however, was a matter for the College.[21] The Department added that it would expect the College to seek compensation.[22]

26. On the basis of legal advice received since we took evidence, the College's Board has decided not to pursue an action against the auditors because it would not be a prudent use of public funds. The College told us that the advice indicated that any claim would be dependent upon demonstrating that the auditors' breach of duty had caused loss, and that assessing that loss would be a complex issue requiring expert accountancy evidence. Any such action could be lengthy, costly and vigorously defended. Costs of preliminary investigations into the viability of such a claim could reach £50,000 in legal fees and £100,000 accountancy fees, plus VAT. 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 prospects of small financial rewards.

Governance

27. The Committee put it to the College, that Parts 4 and 5 of the Comptroller and Auditor General's report indicated that the Board did not always know all they should about what was going on. We asked them what action they were taking to ensure that the governors were sufficiently involved in strategic decision making and adequately informed about all significant developments in future. The Acting Principal told us that based on the findings of the College's three internal review groups a number of changes were being introduced. These included:[23]

establishment of a new Curriculum and Quality Committee of the Board;

revised terms of reference for all committees;

more frequent meetings of committees;

the designation of additional posts as senior post-holders with direct access to the Board;

improvements to the reporting arrangements, including revisions to the format of the management accounts and other financial reports, to provide better information to governors on the links between key issues and targets;

revisions to the financial regulations and standing procedures;

developments to the Audit Committee arrangements to reflect the Funding Council's new Code of Audit Practice;

revisions to the Code of Conduct.

28. The Acting Principal added that the College would now expect the Board to be fully and properly informed about all the major parameters surrounding any major decision prior to it being made.[24] And he assured us that he was now confident that mismanagement on this scale could not happen again, without the governing body knowing about it.[25]

29. The Chairman of the Governors added that a key factor in the problems at Halton was that the previous Principal had adopted a fairly determined and heavyweight approach. The College was sure that a lot of staff under his control had been frightened of saying anything that might have prejudiced their own jobs. A number of people had in fact lost their jobs at the time, and although the Board had been told that this was because the staff were not up to the job, it turned out that they did not agree with the Principal's way of running things. For the future, they had made other senior post-holders, which would give them the opportunity to tell the Board when anything untoward was going on.[26]

Action taken against the Principal and Deputy Principal

30. The Board suspended the Principal and Deputy Principal in May 1998 pending the outcome of the Funding Council's investigation.[27]

31. In his report published in April 1999, the Chief Executive of the Funding Council concluded that the Principal of Halton College had failed to:

put in place and ensure the exercise of proper controls to ensure the accuracy of the students records and funding claims;

operate within his delegated authority for incurring expenditure;

ensure that the governors received proper financial information from which they could adequately monitor the college;

ensure that there was propriety and value for money in the use of public funds.[28]

32. The Funding Council considered that the Principal had not properly discharged his duties as accounting officer of the College, and that there were sufficient reasons for the Board to review his conduct with a view to deciding whether he should remain in post. The Board established a Special Committee to consider this matter.[29]

33. The Funding Council further concluded that the Deputy Principal had been directly implicated in some of the allegations, and had failed to stop or attempt to stop others. They considered that the Board should also investigate her conduct, and the manner and effectiveness by which she discharged her College-wide duties. The Board's Special Committee also considered her position.[30]

34. The Principal and Deputy Principal resigned in April 1999, some eleven months after the Board suspended them on full pay. We queried why disciplinary action had taken such a long time.[31] The College told us they had decided to wait until publication of the Funding Council's report, and to give the individuals the opportunity to defend themselves.[32] Legal advice had supported this view.[33] The Board, the Principal and Deputy Principal received copies of the draft final report in November/December 1998, providing them with the opportunity to correct any factual inaccuracies.[34] Although the Principal and Deputy Principal subsequently mounted a very strong defence, the Board decided to institute disciplinary proceedings immediately. These were delayed, however, because both the Principal and Deputy Principal provided medical certificates that they were unfit to take part. The hearing eventually took place in April 1999, after the Board had given the Principal and Deputy Principal an ultimatum that the hearing would proceed without them. Both tendered their resignations (which had immediate effect) in the middle of the hearing, on the same day that the reports by the Comptroller and Auditor General and the Chief Executive of the Funding Council were published.[35]

35. The Chief Executive of the Funding Council considered that it would have been possible for the College to proceed with disciplinary hearings on the basis of the evidence as at May 1998.[36] He acknowledged however, that the Board was faced with two very litigious individuals, who had issued legal challenges at every stage of the investigation to date, and insisted on due process.

36. In evidence, Professor Melville confirmed that, to his understanding, the college had had no input into the funding of legal costs and that they would have been paid by the Principal's and Deputy Principal's indemnity insurance through the Association of Principals of Colleges; however, since taking evidence,[37] we have learned that at meetings in April and June 1998 the Board agreed to fund legal costs for the Principal and Deputy Principal, up to a limit of £12,000. The Board considered that the Principal would be instrumental in providing evidence and a response for the College to the original fourteen allegations. As some of the allegations were specially aimed at the activities of the Principal and Deputy Principal, the Board recognised that there might be a conflict of interests at some time, and therefore took the decision that the Principalship should use different solicitors. Confirmation has now been received from the College insurers that the £12,000 will be met through the College insurance.

37. We asked the College how much the Principal and Deputy Principal had been paid while on suspension, and whether they had received any additional packages on their resignations. They told us that the Principal and Deputy Principal have received their salaries for 11 months - £105,000 and £90,000 respectively, excluding superannuation and national insurance - plus payments of £5,600 and £4,500 in lieu of contractual obligations for holidays.[38]

38. We asked the College whether it had considered recovering any amounts from the Principal and Deputy Principal, particularly salary based on performance, any money lost on the sale of etchings or prints, and money spent on overseas trips, other than on behalf of the College. Since we took evidence, the College has received legal advice offering the view that it might be possible to seek compensation for breach of duties, but that any such action could be costly and could quickly become uneconomic. The Board had therefore decided to take no further action.[39]

39. We asked whether any action was being considered against the senior management team, the governors or the Clerk to the governors. The Funding Council told us that the scope of the investigations had focused on the role of the Principal and Deputy Principal of the College, and that it had been important that the governing body was in place to carry through any disciplinary proceedings that arose from them. Nevertheless, the Funding Council had explained to the governors that the increasing size of the overclaims, and the other results of the investigation showed that there were weaknesses in governance. The Funding Council recommended that the Board should consider the position of the then Chairman of the governors, and he had since resigned. The rest of the governors would be resigning in July. If they had not decided to stand down, the Funding Council had the statutory power under section 57 of the Further and Higher Education Act to dismiss them. The Acting Principal of Halton College added that there was an investigation into the possible culpability of the rest of the management team, and that would be completed by the end of May 1999.[40]

40. We asked the Funding Council and the College what other costs they had incurred in investigating the events at Halton.[41] They told us that the cost to the taxpayer, excluding the staff time, was about £475,000. This included £300,000 fees for the Funding Council's forensic auditors and lawyers, and a further £175,000 for the College's specialist advisers and lawyers.

Conclusions

41. It is highly unsatisfactory that Halton College overclaimed almost £14 million, and that to a large extent these overclaims evaded the financial controls in place at the College and in the Funding Council. One immediate impact of the need to repay this money is that 114 people will lose their jobs, and this will cost the taxpayer £1.8 million. Whilst the Department and the Funding Council have assured us that further education provision to the people of Widnes and Runcorn will be protected, the College will need to go through major and painful changes in order to put the core business of the College onto a sound footing.

42. We are deeply concerned at the extravagant spending particularly on overseas trips by the Principal and Deputy Principal. Apart from the total cost - over £210,000 - and excessive individual expense items, the absence of these two senior managers from the College for almost 12 months over five years can only have added to the management problems there.

43. We agree with the Department that the failings at Halton arose through a combination of a strong-willed principal, a weak audit process and a governing body that was not on top of the situation and some of the members of which were beneficiaries of the excessive overseas travel. In particular, we are surprised that the governors of Halton College met only three or four times a year, and question whether this was sufficient for them to discharge their duties effectively. We are astonished at the proposition that trips by seven governors to Kansas and Miami were necessary to allow them to get to know staff, when this enabled them to meet only 24 of the college's staff.

44. The Principal and Deputy Principal were suspended in May 1998, but it took almost a year before any further disciplinary action was taken against them. During that time, they continued to receive full pay totalling £200,000. We note the intention of the Department to propose limitations to the period over which any future suspensions in the sector on full pay can last.

45. We view with serious concern the fact that the Funding Council and the college misled the Committee by agreeing in evidence that the Board of the College had made no contribution to the Principal's and Deputy Principal's legal costs, when in fact they had agreed to pay £12,000. This assertion deprived the Committee of the opportunity to pursue the matter in public.[42] The decision to fund even part of the Principal's and Deputy Principal's legal costs was extraordinary, and could have resulted in the College paying for action being taken against it and the Funding Council. This support may also have contributed to the delays in publication of the Funding Council's report and in taking disciplinary action against the Principal and Deputy Principal, and consequently to the period over which they received full pay while suspended.

46. We note that after taking legal advice, the governing body of the College have decided not to pursue compensation from the Principal and the Deputy Principal, because any action could be complex, and could quickly become uneconomic. We believe the Department should reconsider the contractual arrangements which make it too costly to dismiss senior staff.

47. We welcome the steps taken by the Funding Council and the College to improve governance, internal control, management and audit arrangements at Halton College. We look to the Funding Council to monitor the College closely to ensure that these changes work in practice, especially at a time when the College will be going through restructuring, staff reductions, management changes and the appointment of new governors.

48. We note the concerns of the Department, the Funding Council and the College about the performance of the College's internal and external auditors, Deloitte & Touche. We note that the governing body has decided not to take legal action against the auditors in respect of shortcomings in their audit work because their legal advice is that any such action would be complex and costly, and might not succeed. The Board decided that it would not be a prudent use of public funds to risk large amounts of public money, initially £150,000 plus VAT, against the prospect of small financial rewards.

WHAT IS BEING DONE TO ENSURE THAT SIMILAR PROBLEMS HAVE NOT OCCURRED ELSEWHERE

49. In the light of events at Halton College, the National Audit Office widened its examination to establish the extent to which the weaknesses existed at other colleges in the sector.[43] In looking at these wider aspects, we focussed on:

governance and management (paragraphs 50-55);

the risk that over-claiming may be widespread (paragraphs 56-58);

the extent to which financial weaknesses at Halton were mirrored elsewhere (paragraphs 59-62);

audit arrangements (paragraphs 63-67).

Governance and management

50. The National Audit Office reported that the investigations at Halton College had highlighted a number of weaknesses in some aspects of management, and, in particular, insufficient supervision by the Board of the management and the activities of the Principal. The National Audit Office's survey also showed that similar weaknesses might exist in other colleges.[44] The Department considered it was important to note that there were a lot of good things going on in the further education sector and that the proper entrepreneurial activity of colleges should not be stifled. Nevertheless, it accepted the need for very aggressive action to ensure that the sorts of things that happened at Halton could not happen again.[45]

51. The Committee asked the Funding Council and the Department what they were doing to improve governance and management across the sector.[46] A number of steps had been taken already. The Funding Council had introduced a regional review of all colleges three times a year which enables all matters associated with colleges to be analysed regularly, and colleges experiencing difficulties could be given the necessary support to help them resolve problems as soon as possible.

52. The Department recognised that there were concerns about the quality of principals in some cases but it was reviewing the training and education programmed for existing principals. It was also looking at developing a qualification for aspiring principals.[47]

53. The Funding Council was also taking seriously the need for developing further the support and training of governors. In addition to the annual general meeting with the governors, the Chief Executive meets chairs of governors on a regional basis, focusing on important issues at that time. The Funding Council had also set up a good governance group which, with representatives from the higher education sector, will revise existing guidance for governors and clerks to the governors. All the recommendations in the National Audit Office's report would be included in the revised guidance.[48]

54. The Department told us that following a consultation on Accountability in Further Education in March 1999, Ministers had announced a number of changes that would come into effect in August 1999. These included the requirements for all colleges to maintain a register of interest for Board members; and to ensure that the audit committee has at least one member who is a financial expert.

55. The Department also told us that Ministers would shortly be announcing a raft of further measures to deal with many of the issues raised by the Funding Council's findings at Halton and another college, Bilston Community College, on which the Funding Council had published a highly critical report in March 1999. The new measures announced on 28 April are that:

the Funding Council will have powers to nominate a minority of governors where they have cause for concern about a college, and to require observers and assessors to attend governing bodies;

all governors should within six months of appointment participate in appropriate training and development specified by the Funding Council, to include financial modules and business development;

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

every governor must receive termly reports on the financial position of the college, as the National Audit Office had suggested;

college search committees must evaluate the performance of existing individual governors before proposing their reappointment, especially after two terms of office; and

each college must review annually it decision-making processes and such reviews must be recorded in the minutes.[49]

The risk that over-claiming may be widespread

56. The Funding Council told us that it already had a series of checks in place - for example, over 300 validation checks were undertaken on each college's individualised student record return. However, after the start of investigations at Halton College, the Funding Council carried out additional checks to ensure that overclaims were not occurring for similar reasons at other colleges. We asked about the outcome of these checks and how confident the Funding Council could be that overclaims were not widespread.[50]

57. The Funding Council told us that it had completed a risk assessment across all colleges. This analysis showed that 20 colleges had provided at least 31 per cent of their education provision on a franchised basis.[51] Thirteen colleges closely matched Halton College's growth through franchised courses provided at a distance (Figure 3) , and of these six had similar characteristics to Halton College (Figure 4). Of these six colleges, three - Bilston, Stafford and Handsworth - were already the subject of special reviews but the other three would now be reviewed. If any concerns arose, the college would be required to set up a joint review with the Funding Council.[52]

Figure 3: Characteristics of colleges with similar growth characteristics to Halton College

College	One Day Provision - Rank	Use of NVQs - Rank	Use of APL -Rank	Use of Open and Distance Learning -Rank	Use of Loadbanded Qualifications - Rank
Halton College	15	4	2	26	34
Barking College	301	121	-	294	228
Barnsley College	121	275	-	164	4
Bilston Community College	267	208	-	17	3
Bishop Auckland College	256	35	-	290	50
Clarendon College, Nottingham	89	15	-	63	203
Dudley College of Technology	377	236	-	265	37
Handsworth College	383	124	-	243	8
Josiah Mason Sixth Form College	308	316	-	29	131
Mid-Kent College of Higher and Further Education	216	174	-	1	197
South Nottingham College	242	278	-	248	48
Stafford College	286	1	-	264	323
Waltham Forest College	188	5	-	33	93
Went Kent College	243	78	-	191	271

*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.

Colleges shown in bold are those included in the Further Education Funding Council's final list of six colleges it considers most at risk of overclaims.

Source: Further Education Funding Council

Figure 4: Colleges with similar characteristics to Halton College

College	Date of Last Inspection	Date of Last Audit Visit	Already Under Special Review
Barnsley	April 1997	January 1997	No
Bilston	January 1999	January 1999	Yes
Clarendon	October 1995	March 1995	No
Handsworth	December 1994	November 1995	Yes
Mid-Kent	March 1997	May 1996	No
Stafford	January 1996	November 1995	Yes

Source: Further Education Funding Council

58. Investigations by the Funding Council at Halton College had shown that some £0.9 million would have to be recovered from the College's 1998-99 allocation in respect of 1997-98 courses which the Principal had reclassified from franchised to direct provision. As the rate of funding for franchising was lower for that year, re-classifying enabled Halton College to increase its income. The Funding Council therefore checked whether any other colleges had done the same and found six colleges where extensive changes in the proportion of direct to franchised provision had taken place. Each of those colleges had been asked to provide an auditors' report to justify those changes and the Funding Council was still investigating them. The Chief Executive told us that a number of those six colleges had already indicated in their strategic plans that they would be moving more towards direct provision, and with the exception of Bilston Community College, he did not expect other colleges to have reclassified provision for the purposes of increasing funding.[53] The Department added that they had taken action to constrain the worst abuses of franchising. They had limited franchising, so that the first priority of every college was clearly local provision. External franchising had peaked, and that was right.[54]

Whether other financial matters raised at Halton are mirrored elsewhere in the sector

59. The National Audit Office had surveyed a quarter of all further education colleges to see whether issues raised at Halton College were mirrored elsewhere, and looked at the results of reviews carried out by the Funding Council's Audit Service. Amongst the findings were that:

40 per cent of colleges did not have a procurement strategy, and some acknowledged that there had been breaches of internal controls in procurements;

there were wide variations in the level of overseas travel. Over half of colleges did not, or could not easily say how much they were spending on foreign travel. There were also weaknesses in financial control over authorisations in 61 per cent of colleges.[55]

60. The Funding Council accepted that all these findings were matters of great concern[56]. As a result, the Chief Executive had sent copies of his own report and the National Audit Office's report to all colleges, with a letter drawing their attention to a number of issues, including funding claims, governance, purchase of capital equipment, letting of contracts and United Kingdom and overseas travel.[57] The Department added that with effect from August 1999 all colleges - as a condition of grant - would be required to disclose in their annual accounts all expenditure on travel and hospitality. The Department would also be looking to the Funding Council to audit expense regulations in all colleges and to certify that they are reasonable.[58]

61. As regards controls over expensive items such as etchings, we asked the Funding Council whether they had any plans to issue guidelines to the sector specifying a limit on the delegated powers of principals. They told us that they would be issuing guidance. Generally, they considered a limit of £20,000 was appropriate, but recognised that for relatively small colleges this might be high. So they wanted to consider carefully the level.[59]

62. We asked for details of other colleges which the Funding Council considered to have weak controls. The Funding Council identifed eight colleges out of the 108 colleges visited by the Funding Council's Audit Service in 1997-98, and a further eight from the programme of 1998-99 visits (Figure 5).[60]

Figure 5: Colleges identified by the Funding Council's Audit Service as having weak financial controls

1997-98	1998-99
Stourbridge College North Derbyshire Tertiary College Dewsbury College Ludlow College Hadlow College Melton Mowbray College Kirkley Hall College Hartlepool College	Bolton College Suffolk college East Yorkshire College of Further Education Broomfield College Matthew Boulton College of Further and Higher Education West Thames College Wirral Comjunity College Keighley College

Source: Further Education Funding Council

Audit

63. Internal and external audit services to Halton College were provided by the same firm. We queried the acceptability of auditors carrying out both for any one college. The Funding Council explained that from inception they had taken the view that this was an appropriate practice. It was in line generally with Government guidance and in particular, given that a number of colleges were quite small, was possibly a means of achieving better value for money. In future, however, it would not be allowed, and the two audits would be done by separate organisations.[61]

64. For 1993-94 and subsequent funding claims, external auditors have been required to undertake separate audits of funding claims. In 1997-98, the Funding Council carried out a review of external auditors' working papers on 1995-96 funding claims at 26 colleges. The reviews raised concerns about the standard of audit in 11 of these cases, including:

work programmes not updated to reflect current Funding Council guidance;

insufficient testing of matters specifically identified in the Funding Council's guidance;

assessment of management controls over student records inadequately documented;

inadequate use of analytical review to identify areas of risk; and

insufficiently detailed coverage of franchised provision.[62]

65. The Funding Council planned to carry out 55 new reviews in 1997-98, but this work was delayed by the need to negotiate access to the firms' working papers. Five firms (KPMG, Coopers and Lybrand, Price Waterhouse, Robson Rhodes and Deloitte & Touche) had refused access, and with the assistance of the National Audit Office, the Funding Council had to negotiate and reach agreement on the principles of their access with the Institute of Chartered Accountants for England and Wales.[63]

66. The Department told us that in the light of the Halton College findings, Ministers had also decided to take away from college external auditors the responsibility for the audit of funding claims for future years. In future, all audits of college student numbers, including any specialist investigations where there are serious concerns, will be undertaken by the Funding Council or its contractors.[64]

67. The Funding Council had also been monitoring closely the operation of audit committees, and despite significant improvements since 1993, found concerns about membership of audit committees, conflicts of interest and inadequate monitoring of internal audit. Of particular concern was that internal audit could not be relied on in about a fifth of colleges.[65] The Department told us that they intended to take up with the auditors' professional body their concerns about external audit at colleges. In addition, the Department's internal auditor would be reviewing the Funding Council's inspection and audit process, and would also be carrying out a sample review of the internal audit arrangements at colleges.[66]

Conclusions

68. We strongly support the positive response of the Department to the problems uncovered at Halton College and at Bilston Community College on which the Funding Council has recently published a highly critical report. The newly announced package of improvements to governance and audit arrangements should go some way towards preventing further cases and re-establishing the credibility of the sector.

69. We note the steps taken by the Funding Council to identify those colleges with similar features to Halton, that might therefore also be overclaiming public funds. We urge the Funding Council to complete its investigations as soon as possible, and to let us know the outcome.

70. The National Audit Office found that weaknesses in financial controls at Halton, especially over procurement and travel expenses, might also exist at many other colleges. The Funding Council have sent a copy of their report to every college, and drawn their attention to the key weaknesses found, but we look to them to follow through on all these points in the cyclical audit and inspection work at colleges.

71. We welcome the steps taken by the Funding Council to strengthen the audit of grant claims, and to separate responsibility for internal and external audit. However, we are concerned by the Funding Council's conclusion that internal audit could not be relied on in about a fifth of colleges. We look to them to ensure that internal audit arrangements throughout the sector are rigorous and reliable.

1 C&AG's Report (HC 357 of Session 1998-99) para 1.4 and Figure 3 on page 10 Back

2 ibid, para 4 Back

3 Qs 67-68 Back

4 Qs 1-2, 4, 18, 67-68 Back

5 Q18 and Funding Council's Report, see Evidence, pp 1-2 (Table 1 on page 38: not printed) Back

6 Qs 1-2, 67-68 Back

7 Qs 15, 23 Back

8 Qs 23, 27 Back

9 Q114 Back

10 Qs 5, 71-74, 117 Back

11 Qs 42-43 Back

12 C&AG's Report (HC 357 of Session 1998-99), para 4.1 Back