Public Audit Committee

Meeting date: Thursday, June 22, 2023

Official Report 607KB pdf

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Section 22 Report: “The 2021/22 audit of South Lanarkshire College”

I welcome everyone back. We move to agenda item 3, which is consideration of a section 22 report entitled “The 2021/22 audit of South Lanarkshire College”.

I welcome our witnesses for this evidence session. We are joined by the Auditor General for Scotland, Stephen Boyle. With Mr Boyle are Rebecca Seidel, who is a senior audit manager at Audit Scotland, and David Hoose, who is a partner at Mazars LLP, which is the organisation that carried out the audit.

I invite the Auditor General to make an opening statement before we get into questions from committee members.

Good morning, committee. I have prepared a report on the 2021-22 audit of South Lanarkshire College under section 22 of the Public Finance and Accountability (Scotland) Act 2000.

In April 2022, I produced a section 22 report on the 2020-21 audit of the college, which highlighted governance issues that resulted in areas of non-compliance with the code of good governance for Scotland’s colleges. The committee considered that report in May 2022.

I have now prepared a further section 22 report to update the committee on the college’s progress in addressing those issues. I am pleased to report that the college has improved its governance and that it was fully compliant with the code of good governance by the end of the academic year 2021-22. The college has made progress against the external auditor’s recommendations from last year and is committed to making further improvements. The external auditor will continue to monitor its progress.

The committee will recall that, in November 2021, the college’s board agreed to commission two independent investigations into complaints and grievances against the chair of the board and against the principal and interim clerk to the board. The college’s board considered the final reports from those investigations in January 2023. The board agreed to terminate the employment of the principal and the interim clerk to the board; the tenure of the chair of the board ended in May 2022; and a new chair and principal are now in post.

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The governance issues were complex and led to a long period of uncertainty in the college. Up to April this year, the college had spent around £800,000 of public money on the investigations and associated costs. The scope, content, process and outcome of the investigations were not examined as part of the annual audit and are not therefore the focus of my section 22 report.

As you have said, convener, I am joined by Rebecca Seidel and by David Hoose from Mazars. Between us, we will look to answer the committee’s questions.

Thank you very much. I will get us under way and really home in on the compliance issue. When we received the section 22 report last year, there was concern that governance arrangements were way off what they should have been in relation to publication of minutes, internal audit procedures and, even, the convening of meetings. Big alarm bells were ringing at that time.

In this report, you are saying to us, in essence, that stabilisation has occurred and compliance with codes of good governance is in place. It is mentioned in the report that compliance was in place “by 31 July 2022”, which is very precise. Did things happen in advance of or in the lead-up to that date, or was that when the change took place?

I will bring in David Hoose in a second because, through his external audit, he has tracked the progress that his colleagues made with the recommendations in the previous year. Before I turn to him, however, I will say a word or two on the precision of the 31 July 2022 date. It is worth noting that Scotland’s colleges follow a different financial year than the other public bodies across Scotland do. Colleges’ financial years and academic years are aligned, to the end of July.

David Hoose can take you through the detail shortly, but five recommendations were made in the previous year, which we set out in annex 1 to the section 22 report. There has been progress: two out of five of those recommendations are now fully implemented; two are mostly implemented; and one is in progress. I will stop and bring in David to say a bit more about how that has progressed.

Thank you, Auditor General. I second that comment: the progress that was made against the recommendations from the previous year was linear. We reported to 31 July because that was the year-end date, but, as you have seen, our audit opinion was only signed off in April this year, so we have taken into consideration the progress that has been made since the year end.

As the Auditor General has commented, our audit report last year identified five recommendations, against which good progress has been made. The areas that we have identified as being under way are those in which the progress that has been made needs to be further embedded. Good progress has been made in all other areas, such as harmonising timelines and reporting lines between the regional strategic body and South Lanarkshire College, but work still needs to be done to improve them further. Our summary, as the Auditor General has said, is that good progress has been made against three of the five recommendations, with the other two fully addressed.

Thanks for that. I bring in Craig Hoy, who has a couple of questions to put to you.

After what appears to have been quite a protracted period during which the audit and risk committee and the board did not meet, they both did so in November 2021. What was the catalyst for those meetings resuming, and, in your view, are the board and the audit and risk committee now meeting regularly?

That is our understanding, Mr Hoy. Again, David Hoose can talk you through the process and the chain of events up to where we are now.

We touch on this point in the section 22 report, as well, but I will just share with the committee that, on the back of various reviews that stretch back to the summer of 2021 on engagement with the college, the regional board and the Scottish Funding Council on governance matters, the progress against the recommendations that is set out in the report sits alongside a rolling governance improvement action plan, which is a welcome positive development. Instead of a one-off series of events, it is evidence of a college that is keeping its governance arrangements under regular review.

David attends the audit committee, so he can take you through its work and that of the board.

I am not party to what happened before November 2021, as I have come relatively recently to this engagement. However, during my time with the college, the board and all its committees have met regularly—we have been involved in a number of those meetings—and appear to have discharged their duties appropriately.

The audit body recommended that

“the college should reduce or extend the tenure of some members to provide for improved continuity of membership at the end of individuals’ tenure”

and said that that is being considered by the college. Will you provide some detail on how the college is taking that recommendation forward, and on the timescale for achievement?

The college has sought to recruit six new board members, in May 2023. That has gone out to advert. When it has those board members lined up, it can consider the length of the tenure of those board members and of its existing board member team and can appoint people to different tenures, so that there is succession planning, whereby not all those people’s terms of office will finish at the same time.

At the point at which the auditor signed their opinion—in March 2022—papers for the college’s board and committee meetings that were held after June 2021 were not publicly available on the college’s website. However, by 31 July 2022—the date that the convener alluded to—the college was compliant with that aspect of the code. It therefore sounds as though things have improved. To what extent, though, did the college take prompt action on that recommendation? Do you have any concerns that it was too slow in meeting it?

My recollection is that it was addressed promptly. As the report has mentioned, there were issues for the college in its clerking and governance professionals. However, once those individuals were in place, the matter was addressed promptly.

Do you have any niggling or on-going concerns about compliance in relation to the timeous publication of minutes and reports of meetings?

No.

That is fine. Thank you.

One issue that was highlighted last year, which is not just an issue in South Lanarkshire College and can exist in other public organisations, is to do with training, including induction training, for board members who are involved in the governance of those organisations.

In paragraph 18 of the report, reference is made to induction training that was organised in early 2022 and then in the spring of that year. My question is twofold. First, do you have any evidence that those induction sessions made a difference? Secondly, David Hoose mentioned that six new board members are in the process of being recruited. Do you know what the induction arrangements will be for them? Are programmed induction events and other support mechanisms in place to make sure that the people who are involved in the governance of the college understand what their roles and responsibilities are? Auditor General, I turn to you first.

We also referenced in last year’s report that, inevitably, Covid had involved an interruption to the ability of not just South Lanarkshire College but all public bodies to bring on new board members effectively during that period. We all recall that much of that would have been done online rather than as a series of face-to-face events to support new people into the college environment.

It is worth stating that colleges and public bodies are looking to broaden their reach when it comes to the diversity of those who sit on boards, and another dynamic in colleges is that they have staff member representation and students on the board, which is all the more reason for board member induction to be undertaken properly.

Coupled with that, as David Hoose mentioned and has been touched on, recruitment is out for six new board members. There are signs of progress, therefore, and David can speak about the arrangements that are in place.

However, to relate back to Craig Hoy’s earlier question, there is a rolling programme of evaluation of the effectiveness of the governance that is in place. The induction is only one part of that. It needs to be done effectively. The chair of the board’s interaction with board members, the appraisal arrangements and the effectiveness of board member networks are all part of ensuring not just that the induction runs smoothly but that that transitions into effective governance arrangements and contribution from board members for the duration of their tenure. I will bring in David Hoose to say more about the intervening arrangements.

I have very little to add about the training to what Stephen Boyle has said. I am aware that the college has made a concerted effort to make sure that the training is tailored rather than assuming that one size fits all. As the college seeks to recruit board members who have specific skills, they will, by default, need training in different areas.

That is helpful. Willie Coffey has some questions to put to you.

I would like to ask Stephen Boyle about internal and external audit issues. Your report says that there were delays to the appointment of internal auditors, which meant that the internal audit plan was not approved until later, but the audit function and internal audit work was carried out. What is your perspective on that work? Was it successful? What were the risks of carrying out audit work without a plan?

You will recall from last year’s discussion that, during the 2020-21 year, there was a change of internal auditors from Azets to Henderson Loggie. That was one of the reasons for the governance disclosures that were made by the college in its annual report and accounts last year. The governors stated that not having continuity of internal auditors brought them into conflict with the requirements of the good governance code.

We note that there were delays in appointing Henderson Loggie that contributed to the delay in the production of the internal audit plan. The audit and risk committee would expect to see the internal auditors’ plan, which is really the basis of that committee’s evaluation of the risk to the control environment of the organisation, and it uses that to direct the internal audit of the organisation to best effect. That is now in place, and it was approved by the committee in May 2022.

The factors behind the period of delay were somewhat less clear. The college needs to assure itself that it is getting the right level of effective governance and assessment of controls across its operations. David Hoose might want to say a wee bit more about that because, as part of his annual external audit, he is required to consider the work of the internal auditors.

Two dates were involved with the internal audit plan. My understanding is that a draft plan was discussed at audit committee level in March 2022, and the final plan was agreed in May. In my experience, that is not unusual. That delay is about

the board challenging some areas that have been identified for review. As the Auditor General has said, one of the things that we do during our audit is consider the work of the internal auditors, and the plan of works that they agreed with the board in May was delivered fully during the year. The internal auditors delivered the fullness of their plan.

The college’s annual report commented that internal audit considered that the college had

“adequate and effective arrangements for risk management, control and governance.”

Do you share that assessment?

We have not found anything to contradict that. I refer you to our annual auditors’ report. We did not identify any internal control recommendations from our work. There is nothing to suggest that that is not correct.

You will recognise from your time on this committee, Mr Coffey, that auditors do not often engage in hyperbole, so “adequate” is usually an indication that there is nothing to report and, as David Hoose said, he did not find anything to report. That is probably a reasonable assessment in satisfactory language.

Thank you for that.

You are clearly saying that good progress has been made with the governance improvement plan but that some areas have not yet been addressed. What might those areas be?

I will bring David Hoose in again here as he is closer to the detail on it. I will just take the chance to repeat my overall views that having a governance improvement plan and a rolling action plan is a positive aspect of the college’s consideration of governance and its commitment to keeping those matters under review. David Hoose can speak to the committee about the steps that have been taken.

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As the Auditor General said, significant process had been made in relation to the governance improvement plan. These are a different set of recommendations to those from our audit last year. Some were time bound in relation to the college’s ability to deliver against them. One of them related to the appointment of a permanent governance professional, which could not be completed until the investigation was completed in January 2023. There were recommendations that the college had progressed but, because of other factors, still had work to do on.

It is also pleasing in my mind that, as the Auditor General said, the college has accepted that there needs to be continued review of governance. The governance framework that it has put in place enables it to capture any governance actions as they arise—such as appointing owners or appointing timelines—and to keep them front and centre for the board to make sure that governance is continuously improved.

That is good.

There is another comment about the reporting timetabling of the college’s board and committees

“so that there is a timely and efficient report”.

Will you explain a little bit about what you mean by that? Are we satisfied that that is also satisfactory and in place?

Can you highlight the paragraph for me, Mr Coffey, so that I can make sure that I am commenting on the right bit?

I think that it is on page 11.

Thanks very much. Yes, I have that now.

The committee will recall that there is a complexity to the arrangements in South Lanarkshire College in that it is part of a regional college arrangement. I will maybe say a further word or two about that in a moment, convener.

South Lanarkshire College operates as part of the Lanarkshire arrangement in which there is a strategic body, which we refer to as the Lanarkshire board in our report. The recommendation was that South Lanarkshire College’s meeting arrangements should be aligned to those of the Lanarkshire board to enable the flow-through of decision making, co-operation, governance and accountability to operate effectively. David Hoose can say more about the progression of that.

It is worth coming back to the point about where the regional college arrangements sit. The committee may recall that the Scottish Funding Council made recommendations to the Government on the back of a review that largely stated—I am paraphrasing—that the current arrangement were not serving to best effect the operation of the accountability and governance arrangements of Scotland’s colleges. As we recall, those recommendations were accepted by the Scottish Government, but we have not yet seen progress in relation to how structures that are currently in a regional setting will operate in future.

I have drifted off topic a wee bit from Mr Coffey’s question, but I will turn to David on the alignment of meetings.

Our understanding is that, historically, the meeting timetables for the regional strategic body and South Lanarkshire College have sometimes been prepared in isolation. That has not facilitated matters that have been discussed at the South Lanarkshire College board that need ratifying at the regional strategic board being passed up in a timely manner. In addition, where there is possibly overlap of committee members, sometimes those meetings clashed. It was a case of making the two timetables work more coherently and efficiently.

Are you happy with the new arrangements?

We are happy with the progress. As I said earlier, there is still progress to be made, but we have seen good evidence of progression.

Given the consolidation of the college sector that we have seen over the past decade, it seems a little bit excessive, does it not, to have a regional college board that has oversight of just two colleges?

The SFC’s review largely concluded that the arrangements were not well understood or accepted, and that they brought conflict into the arrangements. Whatever future structure the Government decides on, it will of course want to weigh up the number of colleges that exist in a regional setting or otherwise. The SFC’s review recognises that the current regionalisation arrangements have the hallmarks of some of that conflict and lack of understanding. We have perhaps seen evidence of that through some of our own reporting on Scotland’s colleges as well. We are keen to see where the Government will go next on that.

That is good. Thank you.

The deputy convener, Sharon Dowey, has some questions.

Good morning.

We noted that the independent auditor is monitoring progress against the governance review programme. When was the programme implemented, and what has been the progress to date?

Good morning, deputy convener. David Hoose, the independent auditor, is sitting beside me. I ask him to update the committee.

The governance monitoring programme was first implemented at the December 2022 board meeting and was first populated at that point in time. I understand that that is now a standing item of business at every board meeting.

What progress has been made in appointing a permanent clerk to the board?

David Hoose mentioned that the plan is to recruit for an experienced governance professional—I think that that is the language that has been used. With regard to progress on recruitment to that post, David might be able to provide an up-to-date position.

I do not have anything to add. I am not aware of where the college is at in that regard.

The report states:

“The auditor considered the implications of the investigations for the college’s compliance with the Code.”

Can you provide more detail on the outcome of those considerations?

Certainly. As we mention elsewhere in the paper, and as Stephen Boyle mentioned in his introduction, we have not had full sight of the independent investigation reports—that was not considered appropriate. Therefore, we had to put in arrangements to assure ourselves as auditors as to whether any matters were raised in those investigations that would impact on our opinions. We requested that the college prepare a detailed paper for us that set out its consideration of those reports and whether there were any matters identified in them that could impact on our work on governance and on the financial statements.

To ratify that paper, I met the partner from the college’s main legal adviser, who had had full sight of the independent investigation reports, to triangulate the college’s paper with his understanding of what had been said.

Bill Kidd has an important question to put to you.

As we all know, this is a time when everyone is facing some financial difficulty. Colleges are no different. Colleges across the country face issues with costs and financial stability.

During this period, £800,000 of public money has been spent on investigations and associated costs at South Lanarkshire College. To what extent has the expenditure of that large amount of money helped to improve the college’s financial stability, compared with that of other colleges across the country?

Good morning, Mr Kidd. There are a number of components to your question, which I will address in no particular order. I do not think that we could say that the spending of that £800,000 has directly contributed to improving the college’s financial sustainability. The investigation was in respect of concerns and grievances relating to the principal, the interim clerk and the chair of the board. David Hoose might wish to say a bit more beyond what he has already said about the limited extent to which that related directly to our audit work.

However, we have drawn a connection with regard to the spending of £800,000 of public money on such matters at a time when not just South Lanarkshire College but many of Scotland’s colleges are experiencing financial challenges. It is identified in the college’s own annual report and accounts that the college anticipates that it will receive a flat cash financial settlement over the course of the next five years and forecasts that it will have a deficit in many of those years, to the extent that the college’s board of management was able to offer assurance only on the in-year budget for 2022-23 and not on the budgets for future years.

Given those longer and medium-term financial challenges, the fact that the college had to spend £800,000 of public money in that way will not have contributed to its future financial sustainability. We are clear on that point but, again, David Hoose might wish to offer an additional perspective, based on his annual audit.

There is little for me to add. As Stephen Boyle said, there is a significant chunk in our report on the college’s financial position. The report identifies that the college has identified an operational funding gap over the foreseeable future—the period to 2027. Stephen Boyle mentioned the flat cash funding settlement from the Scottish Funding Council. That is a contributory factor, and it impacts on all the Scottish colleges at a time when they are facing inflationary pressures. That is a challenge for the sector as a whole, and South Lanarkshire College is no different.

Is there a way in which the large amount of money that has been spent in this instance will help the college to move towards being in balance? There is a financial issue across all colleges, as we have talked about, but it has probably been worse in this case during this period. Will the money help to bring back a degree of balance in terms of temporary staff and so on?

That is not our understanding. The nature of the spend was in respect of investigations arising from concerns and grievances about the former chair, the former principal and the former interim clerk of the college, as opposed to consideration of wider financial activity or challenges. Rebecca Seidel might want to say a wee bit more about the financial challenges that Scotland’s colleges face as they relate to their activity.

As has been said, the entire college sector in Scotland faces financial challenges going forward, and risks to financial sustainability are a theme that came through in a lot of our annual audit reports from 2021-22 on all Scotland’s colleges.

South Lanarkshire College has historically operated on a balanced budget; it has always been in surplus. It remained in surplus and had an adjusted operating position that was a surplus in 2021-22 but, nonetheless, that does not take away from the fact that, looking ahead, there will be real pressures on the whole college sector. Some of those pressures have been mentioned: the flat cash settlement, inflationary costs relating to staff pay and other costs that colleges incur, such as increased costs through their supply chain. Although South Lanarkshire College remains in surplus, that does not take away from the fact that there are challenges ahead for the college and the wider sector.

Perhaps I was conflating two areas a wee bit. When you see large sums of money, you tend to look for the positive benefits, but those are two separate areas. Thank you for the answer.

The £800,000 was spent predominantly on paying lawyers to carry out the investigations, as I read the report. Where did that money come from? Did the college have reserves that it could draw on? Presumably, that was an unanticipated outlay that would not have been budgeted for.

You are right about that, convener. The majority of that £800,000—it straddles two financial years—was spent on legal fees. David Hoose can keep me right on this: £450,000 was spent up to the end of the financial year at the end of July, with a current expectation that that figure will be £800,000 in totality. As I said, the majority of that money is for legal fees, with other elements relating to interim postholders’ fees, because some members of staff, including the principal and the interim clerk, continued to be paid by the college while they were suspended for the duration of the investigations.

It is also the case that, although there would be lawyers’ fees, human resources investigations were undertaken alongside lawyers who would have overseen those investigations.

You mentioned earlier that auditors are not prone to hyperbole, but you think that it is absolutely right to highlight that spend in your report as a matter of public interest, if not public concern.

Indeed—£800,000 is a significant sum of public money. As Rebecca Seidel rightly says, Scotland’s college sector has been under financial strain. The committee has taken a keen interest in Scotland’s colleges, and you held a recent round table about some of the challenges that the sector faces. For South Lanarkshire college to have spent £800,000 of public money on HR investigations that do not relate to its financial future or its activities is regrettable at a time when the money would ideally have been better spent on its activities or in consideration of its future arrangements.

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We are joined this morning by Graham Simpson, who has a number of questions that he wants to put to you, Mr Boyle.

Good morning, Auditor General. This has been a bit of a sorry saga, to put it mildly. I do not want to go over the evidence that you gave last year, so I will not do that. Instead, I will concentrate on what is in your current report. As you said, the upshot is that the chair has gone and two highly respected public servants—the former principal and the interim clerk to the board—have lost their livelihoods. That is where we are at, and £800,000 has been spent so far. Where has the £800,000 come from?

David Hoose can say a wee bit more about that but, as we mentioned, it is our understanding that the majority of that money has been spent on investigations, led by lawyers and supported by HR professionals, with the balance relating to interim costs for the college of employing interim principals and interim acting clerk arrangements.

That was not my question; my question was that the £800,000 that has been spent must have come from somewhere and—given the risk to the sector, at the moment—I would like to know which budget it has come from.

My apologies. David Hoose will pick up on the specifics of your question.

If you compare the college’s financial statement for the year to July 2022 with the one for the year to July 2021, you see that the underlying result for the college is £500,000 to £600,000 lower in 2022 than it was in 2021. The main contributory factor to that is the £450,000 spent in the year on those investigations. It has come from operating budgets.

Is that the main reason for the funding gap that you referred to, Mr Hoose?

I do not believe so. The funding gap that I mentioned is primarily looking forward from the current financial year to 2026-27, and it is driven by the advice from the SFC that colleges should reflect a flat cash funding payment in their forecasts.

You have not identified where the money has come from or from which budget it has come, but it would be fair to say that, if the college had not spent that £800,000, it could have been spent on learning.

If the college had not spent the £450,000 that is in its 2021-22 annual report, it would be at the discretion of the board of management, which is charged with governance, to determine how to spend that money, but, yes, it would have been able to prioritise its core function of delivering training and learning activities, rather than spending the money on legal and HR investigations.

We have mentioned the former principal, who has been sacked, and the former interim clerk to the board has also gone. My understanding is that both will go to employment tribunals. We do not want to get into that, but there is a risk of extra costs to the college from that process—particularly if the individuals are successful. Do you know whether the college has budgeted for that?

I am not party to any potential or live employment tribunal arrangements. In any circumstances in which a public body has a potential liability, it needs to make an accounting judgment about whether that is live or realised, and it should consider how to disclose that as either a contingent liability or a provision in its future accounts. That is about all that I can say about the circumstances relating to the case.

If there are any live cases, I do not want to prejudice them by discussing them at this meeting of the Public Audit Committee.

Absolutely, convener. I do not want to get into the rights and wrongs of anyone’s case; it is merely a financial risk that people need to be aware of, and that is why I raised it. We do not know where that situation will end up.

It emerged last week that South Lanarkshire Council and its leisure trust were involved in a case that went to tribunal and has cost them £800,000—the same figure as in South Lanarkshire College’s case—at the end of it, so such things can be enormously costly to public bodies.

There was a view in the sector, and when I say the sector I mean college principals, that that particular principal was—

In fact, let me rephrase that, because we do not want to get into the individual case. There was a concern from the college principals group that principals can be removed too easily if there is a falling-out with the board. If that happens, we can start to accrue the sort of costs that have been seen. Are you aware of that, Auditor General?

No, I am not aware of the view that has been expressed by the college principals group.

The group wrote to the former education secretary about that, but you have not seen that.

Let us talk about this case. Do you think that, if procedures had been put in place, we could have avoided getting to the position that we are—

Sorry, Mr Simpson, but procedural matters may well be the subject of future litigation, and I am not having anything played out at the Public Audit Committee of the Scottish Parliament that may later form parts of arguments that take place at employment tribunals or in other litigation settings. Please do not put that question to the Auditor General. If you have other questions about the report, please ask them, but if not, please draw your questions to a close.

I will draw them to a close at this point.

Okay, thank you very much.

As no other member of the committee has a question to put, I thank you, Auditor General, for your evidence this morning. David Hoose and Rebecca Seidel, I thank you both, too.

10:37 Meeting continued in private until 11:27.