“The 2007/08 Audit of Stow College”
Item 2 is consideration of a section 22 report on the 2007-08 accounts of Stow College. I ask the Auditor General to give us a briefing.
Good morning, convener. This is a report under section 22 of the Public Finance and Accountability (Scotland) Act 2000 on the 2007-08 accounts of Stow College. Although the college's 2007-08 accounts were not qualified, the notes to the accounts disclose a contingent liability. That means that there is a liability that might arise, depending on the outcome of certain events in the future. That could result in the Scottish Further and Higher Education Funding Council clawing back funding from the college, and the amount could be significant.
Thank you for those remarks.
The circumstances are unusual. Some years ago, Stow College inherited from West Lothian College the arrangement with Sibbald for training provision. However, at that stage, there was no contract in place, and the funding council is concerned that no contract has subsequently been put in place.
Do we—or you—know whether Stow College does the same thing with other significant income streams, and are you in a position to say whether the practice is common to all Scotland's colleges?
We do not know the extent to which Stow College might or might not have applied a similar arrangement to other funding streams. However, I can say that the funding council instructed its internal auditor to examine five projects, and the two projects covered in my report gave the greatest concern.
Why were written contracts not introduced until July 2007? Given that that represents a four-year gap for the construction industry training and a seven-year gap for the courses at the Glasgow Chinese School, the college's approach to two very important activities seems very slipshod.
As I said, we have not conducted a full audit investigation. As our report is based on the college's audited accounts, your question would be better addressed to the funding council and the college itself.
Can you confirm that Stow College decided to opt out of the planned merger of colleges in Glasgow, which was proposed to create improved service delivery?
That is correct. Stow College was originally one of the partners in the plans for the merger, but it withdrew from that partnership comparatively recently.
From reading the section 22 report, it seems that the college did not monitor the situation properly. A third party was delivering Chinese courses, which are very important—I declare an interest in the subject. If that situation was not monitored properly, is it a question of banging heads together to bring about a proper monitoring situation? Does the SFC have powers to do that? The college must see that the way forward is to put the monitoring on a proper footing.
The implication in your question is correct: arrangements for proper monitoring should be in place. The funding council has taken the initiative to try to rectify the shortcomings in the situation and, as I said, the matter is the subject of continuing discussions between the college and the funding council.
I understand that five programmes were examined by the funding council.
Yes.
Two programmes are in dispute, which means that 40 per cent of the programmes that were examined have thrown up problems. Is it possible that such problems are more widespread in Stow College?
I am not sure that the inference of 40 per cent is correct. Forgive me if I misled the committee: what happened was that the funding council asked the internal auditors to examine five specific programmes, and as a result of the internal auditors' review, findings of sufficient concern were produced in relation to two programmes—the arrangement with Sibbald Ltd and the arrangement with the Glasgow Chinese School—to lead me to produce the section 22 report.
Did the funding council have existing concerns about the five programmes that it asked the auditors to examine, or did it just pick five at random?
There are detailed comments about the other programmes in the internal auditor's report, but they are not as significant as the comments on the two projects that we have identified in our report.
What is the Scottish funding council's role in monitoring such issues?
The Scottish funding council has a central role. It is the funder of the colleges, as a result of which it has a duty to allocate funds to all 39 colleges in Scotland. It has clear allocation criteria, which are based on a formula plus conditions. It has a duty to oversee the standards of governance in the colleges, and a general duty to satisfy itself about their level of performance. The funding council is the main organisation with responsibility for overseeing such matters and taking appropriate action.
Should the SFC have picked up the problems earlier?
I am not in a position to answer that. The point is that the SFC commissioned an internal audit report when the possibility of problems at the college came to its attention. It would be difficult for the SFC to find out about every case of a college making submissions that do not comply fully with the funding requirements. It has found issues in relation to the situation at Stow College that gave it cause for concern, and it has taken appropriate action by immediately commissioning a full internal audit review.
You referred to the situation coming to the SFC's attention. Does the SFC not have inspectors who go around the colleges to keep an eye on such things?
It has what were once called the feds, who interact closely with the colleges to help them achieve sound financial management. Her Majesty's Inspectorate of Education also has a role in inspecting the quality of the courses that are delivered in colleges.
Are you aware of the—
Excuse me, but I may have misled the committee. Mark MacPherson may be able to help. Was that an accurate answer?
I was just going to add that that the funding council requires all colleges to submit student unit of measurement—SUM—returns each year to confirm the number of students who have participated in the various programmes that they offer. Those are generally subject to review by each college's internal audit team. However, given the number of students that most colleges have, a sample-based approach is taken. It is possible that, even though the internal auditor conducted a check on some programmes, they did not check all the programmes that were picked up in this internal review. The funding council uses additional methodologies to try to gain assurance about participation in individual colleges.
What about the members of the college's board of management? Are you aware of the composition of the board and whether there are people on it with accounting or similar qualifications?
There are two issues. One relates to the way in which board members are appointed, which has been the subject of previous interest on the part of the Public Audit Committee. It is an issue to which we will return when we present to you, in a few months' time, our review of how boards work in Scotland. The second issue relates to the way in which the boards operate. We can assure you that, in Stow College and generally, contracts are let by the executive team and not by the board members. In the case of Stow College, the senior person in Sibbald is on the board and the internal auditor has drawn attention to that. However, the internal auditor concluded that they had no concerns about the operation of governance in Stow College because the interests of that person were properly declared and recorded.
The next paper on the committee's agenda is an update on the financial position of colleges. As part of our work on that, we asked auditors to give us some assurance that there were people with appropriate financial expertise in place. The response that we received was that all colleges had someone on the board who had appropriate financial expertise.
Mr Black said that the contracts are awarded by the executive team and not by the board. Does the executive team have to report to the board on those contracts—on their terms, progress and success or otherwise?
That should happen. We do not have the full information that would provide you with unqualified assurance on that. Nevertheless, one might reasonably expect the board to have a role in monitoring the performance of the contracts that are run by the college.
As the Auditor General said, we previously took an interest in the issue of boards. That resulted in some fairly intemperate letters from college principals, complaining about the committee even asking questions about the process. Notwithstanding what Mr Black has said, Andrew Welsh has pointed out that one programme ran without contract for four years and that another ran for seven years without contract. The construction industry training contract amounted to nearly £1 million per annum—is that correct?
Yes.
That was in the most recent year. In previous years, it was worth a lot less than that. That may have something to do with the contract arrangements.
Okay. The contract rose to almost £1 million. I accept what has been said about there being no impropriety in relation to the board member who is from the company in question in the award of the contract, but if there are cosy relationships and executives who award contracts that are not subject to competitive tender, it will be easier for a contract to be awarded to a known person who sits on the board. I question whether contracts of such magnitude should be awarded in that way and in particular whether that should have happened when someone from the construction company in question sits on the college board. The individual no doubt gives his valuable time and expertise, which are undoubtedly welcome, but we can see how suspicions arise when such companies end up as beneficiaries of contracts that have been awarded without competition. I think that the matter needs to be considered.
I remind the committee that part of the concern in this case is that there were no formal contracts. The concern is that there are arrangements that represent more than 30 per cent of the weighted SUM returns claimed by the college and that the lack of formal contracts setting out each party's rights and duties means that the arrangements do not measure up to the standards of governance that one would expect. Although the auditor has no concerns about the corporate governance arrangements, the position of the gentleman concerned would be safeguarded if the contracts were properly tendered and awarded and robustly monitored.
I would like to provide a little bit of perspective. We are concentrating on a particular aspect of a particular college. Back in 1999, the whole system—with, I think, the honourable exception of Angus College—was in considerable financial disarray, to put things mildly. That the situation has been turned around is a compliment to Audit Scotland. Five of the 39 colleges are in deficit, but all five have accumulated surpluses to cover those deficits. At least we can now concentrate on one college; in the past, there was a problem with the whole system.
We will consider the broader picture under the next agenda item.
I am interested in why the college's internal audit did not pick up the problem. Is it being suggested that it was picked up, but that there is a fundamental disagreement between the Auditor General's findings and the college's opinion? Paragraph 10 of the Auditor General's report says that the college sought legal advice
I apologise if I am not explaining things as clearly as I should. The discussion is between the funding council and the college. My role is simply to provide a short report on the basis of the audited accounts. An investigation into the five contracts was commissioned by the funding council and led by its internal auditors. The college does not accept the funding council's findings, which are based on its internal auditors' report. That is still a matter of discussion. I am sorry if I have given the impression that the college is in dispute with my views and those of Audit Scotland. The issue is between the funding council and the college.
Who will resolve that dispute? What mechanism will be involved? Will the dispute be resolved by mutual agreement?
The funding council and the college are having on-going discussions. I strongly encourage the committee to await the outcome of those discussions. As I said earlier, one of the main reasons why I produced my report was the distinct possibility that the funding council will consider clawing back significant funding and that that will have a significant impact on the college's finances.
Thank you very much for that, Mr Black. We will return to the matter later in the agenda.