“Scotland's colleges—financial position 2007/08”
We move to item 3. I invite the Auditor General to brief us on the wider issue of the financial position of Scotland's colleges in 2007-08.
This is a report on the finances of the college sector for the financial year 2007-08. College accounts close on 31 July each year, so the information is rather out of date relative to where we are now, in June of the following year. The report focuses on the overall financial position and provides an update on the key issues that were identified in the overview report on the further education sector, which I presented to the committee last year.
I do not think that it is appropriate to ask Audit Scotland to produce an annual overview report on the college sector, as I am not sure that that would be a good use of our resources. Nevertheless, I was happy to agree that Audit Scotland would provide a brief update on the high-level financial position, which continues to change. The content of the report is drawn mainly from audit reports and other information provided by auditors on each of the 39 incorporated colleges. We have also used information that is held by the Scottish funding council and, in a few cases, information that was provided by individual colleges.
When I presented last year's overview report, I was able to say that the sector had shown a significant improvement in its overall financial position. The overall surplus held by the sector has increased again this year. There has been a slight reduction—of one college—in the number of colleges reporting operating surpluses, but that is not significant relative to the overall picture.
Of the 39 incorporated colleges, 34 reported operating surpluses in their accounts for 2007-08. Although that is a slight decrease from last year's number, it compares very favourably with the position in the years prior to 2006-07. Mr Welsh has alluded to some of the problems that occurred in the sector in earlier years. The broad direction of travel within the sector is very positive. The overall surplus of colleges' income and expenditure reserves was £124 million at 30 July 2008, compared with £99 million in the previous year. It is worth noting, however, that just five colleges accounted for around 60 per cent of that surplus.
Five colleges reported deficits. Our report outlines those deficits and gives a brief description of the background to them. The colleges were Barony College, Cardonald College, Dundee College, Edinburgh's Telford College and Elmwood College.
Exhibit 1, at the back of the report, shows that the level of deficit compared to overall income varies among colleges, from more than 8 per cent at Cardonald College to 0.25 per cent at Edinburgh's Telford College. It also shows that, at all colleges, there were accumulated surpluses that were sufficient to cover the deficits. That is an important point to bear in mind.
The committee has already considered the section 22 report on Stow College. I do not propose to say anything more about that.
The committee may also recall two issues that resulted in section 22 reports last year. The first related to the accounts of Kilmarnock College, where the auditor could not secure sufficient assurance to provide an unqualified opinion on the accounts. The 2007-08 accounts of Kilmarnock College were also subject to a disclaimer on the audit opinion for the same reason. The investigation has still not concluded, so I am prevented—as I was last year—from commenting on the issue any further.
The other issue that resulted in section 22 reports for a number of colleges last year was the accounting for pensions by colleges. Four college accounts were qualified in 2007-08 as a result of the accounting treatment for pensions. I am delighted to say that Russell Frith, our director of audit strategy, is with me today to answer any questions that the committee may have on that issue. It is fair to say that he is one of a small, select band of people in Scotland who can explain the issue and what it means for the accounts of colleges. I am a great believer in delegation wherever possible, and never more so than in this instance.
In last year's overview, I highlighted a number of challenges and cost pressures for colleges. Members will see from the update report that most of those remain. A circular from the funding council last December said that up to 26 of the colleges forecast surpluses of less than 1 per cent in 2010-11. Colleges are due to submit their latest financial forecasts by the end of June, which will provide an update on the picture. Unfortunately, that information was not available in time to be included in the update for the committee. It is worth mentioning that the risk of colleges losing their charitable status, which was identified last year, has now been resolved. As I am sure the committee is aware, the Scottish Government has since introduced legislation to protect colleges' charitable status.
I am pleased to say that the auditors reported that the governance and management arrangements in colleges were generally sound. As Mark MacPherson said, I reported last year that some college boards of management did not have members with recent relevant financial experience. I am pleased to report that the auditors have confirmed that all college boards now have members with relevant financial experience.
Overall, the position remains broadly similar to that which I reported last year. Like many other organisations in the Scottish public sector, colleges face real challenges relating to the funding settlement and the impact of the economic downturn. Auditors will continue to monitor the situation in future.
I have a question about Kilmarnock College, to which you referred. Yet again, there is a disclaimer on the audit opinion on the college. You have indicated that an investigation is on-going. Some considerable time has elapsed since a completed and acceptable audit process has been carried out. Is the on-going investigation the police one, or some other one? What are the reasons for the delay?
It is a sufficient condition for us not to take the matter any further that there is a police investigation going on. I imagine that our information on the wider context is pretty limited. I ask Mark MacPherson whether we can help at all.
No. You are absolutely right about our information. I have been in regular contact with the board chair in the period between last year and this year, but he has not been able to say much about the situation and I have not been able to ask or say too much about it, either.
Other than the specific issue that is the subject of the on-going investigation, has the auditor picked up any other issues in relation to the accounts at Kilmarnock College?
No. There are no significant issues, other than ones that we might expect with any audit.
I am not clear why the inquiry is taking so long.
I am afraid that I do not know, either.
When did the police inquiry start?
It started before we brought the report to the committee last year.
So it has been going for more than a year now.
Yes.
We have established that it is a police inquiry. We will not go into a discussion on that specific issue.
I emphasise that the qualification on the accounts is not new—it is the same qualification that has been continued from last year, for reasons that the Auditor General and the convener have explained. We received advice previously that we should not engage in any further discussion of the issue until the police investigation concludes. I am absolutely certain that the college is hopeful that the investigation will conclude as soon as possible, which will enable the qualification to be removed from the accounts.
Are there any other questions on college finances?
Why did five colleges not have a detailed and up-to-date fixed asset register when their 2007-08 accounts were signed off? Is that matter being sorted?
I cannot offer a detailed answer on that. The auditors have reported that situation in their reports to us. We expect all organisations to adhere to that standard. In some cases, the asset register might not have been fully up to date, so a review or an update would be needed, while in other cases the register might not have contained enough detail. We do not have the full details of why that happened. The auditors have recommended that the registers be updated. When we receive the reports later this year, we will find out whether that has happened.
Edinburgh's Telford College had a small deficit, but exhibit 1 shows that it had an accumulated surplus of £33 million. Is that not a particularly high figure for a college with that size of turnover?
It is high, but we understand that £26 million of that was from a gain from the disposal of the college's old estate and that the money is being fully reinvested in the new estate. Over time, that will erode the figure. It is an issue of estate development.
I recall that we discussed previously the colleges' plans for future investment and development and whether they had sufficient funds for that. Has there been any further examination of that issue, which was of interest to the committee?
We have not done any further work on that since our report last year. As I explained, we are not in a position to prepare a full and detailed performance audit overview on an annual basis.
As there are no more questions, I thank the Auditor General for his contribution.
We will now move to agenda item 4, which we will consider in private.
Meeting continued in private until 12:20.