Audit Committee, 27 Jun 2007

Meeting date: Wednesday, June 27, 2007

Official Report 245KB pdf

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Section 22 Reports

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“The 2005/06 audit of James Watt College” <br />“The “2005/06 audit of Inverness College”

Agenda item 5 is on section 22 reports. We will discuss recommendations in private, but members may briefly highlight recommendations and ask questions about facts.

I will briefly introduce the reports. We will then be happy to answer members' questions.

Section 22 reports are the mechanism by which the Auditor General can bring any issues that arise from the audits of public bodies to Parliament's attention. We routinely report on section 22 reports to the Audit Committee so that it knows that they have been produced and so that it has a chance to decide on any resulting action that it wants to take.

This year, the AGS has made two section 22 reports on further education colleges: one was on Inverness College's accounts; the other was on James Watt College of Further and Higher Education. Both reports relate to the financial year that ended on 31 July 2006.

The Inverness College accounts are not qualified, but the auditor has again drawn attention to the college's status as a going concern. Some members will know that it has experienced financial difficulties for some time and that we have issued section 22 reports on it every year since 2000-01. Following the report on the college's 2004-05 accounts, the previous Audit Committee held an inquiry, in May 2006, and issued a report with recommendations for the college and the Scottish Further and Higher Education Funding Council.

During the period on which we are reporting, which ended on 31 July 2006, the college incurred a deficit of around £0.7 million on its income and expenditure account, which was equivalent to around 5 per cent of its income for the year. The accumulated deficit at that point was £3.5 million. During 2006, it undertook an efficiency exercise with the funding council's support, which led to the production of an action plan and a new financial recovery plan. The funding council continues to support the college in putting that into effect. We understand that although the college has forecast a deficit in the current year after restructuring costs have been taken into account, it has forecast a small underlying surplus from its operations. Our auditors continue to monitor the position in the current financial year, which is well under way.

Similarly, James Watt College's accounts are not qualified, but the auditor has drawn attention to the college's position as a going concern. It incurred a deficit of nearly £3.9 million on its income and expenditure account, which was equivalent to 10.5 per cent of its income and led to an accumulated deficit of £5.3 million. In July 2006, its bankers declined to renew its overdraft facility. The funding council then agreed to provide advances of grants, totalling £3 million, between July and September 2006 to provide the cash flow to keep the college running. In return, the funding council required the college to work with the funding council's further education development directorate to identify the underlying reasons for the financial problems. The directorate reported to the college in December 2006, and the college accepted the action that it recommended. After consulting its staff, the college developed a financial recovery plan that identified expected savings of around £1.6 million in 2007-08 and cash flow projections that show a small cash reserve by 2010-11. The funding council continues to support the college. A new acting principal was appointed in October 2006 and a new chair of the board of management was appointed in December 2006.

It is worth noting that both section 22 reports relate to the 2005-06 financial year, which, as I said, ended on 31 July last year. The reports were laid before Parliament in March this year as usual, but this is the first opportunity we have had to brief the Audit Committee. The 2007-08 position will be covered as part of a wider review of the FE sector that we plan to publish at the turn of this year. That will cover the issues that the section 22 reports concern, with the wider picture of how the FE sector looks.

I am happy to answer the committee's questions.

Inverness College is an old story—we have been here before. You said that a new financial recovery plan has been produced. How does it differ from the previous financial recovery plan or the one before that?

As you have identified, this is work in progress. Some fairly significant changes in management occurred at Inverness College following the Audit Committee's inquiry in May 2006. A new principal took up post at that point, which was towards the end of the 2005-06 financial year, on which we are reporting.

The recovery plans have been subject to a process of updating as the restructuring changes have taken place. The current plan forecasts a small surplus on operations for the current financial year. At this point, the best thing we can do is say that we will report to the committee on that once our auditors have started their financial audit work for 2006-07. That financial year finishes in a month's time, give or take a couple of days. The report that members have looks back some way, because of the vagaries of the Parliament's timetable.

So we can soon check against delivery?

Exactly.

The financial recovery plan for James Watt College suggests that a small cash reserve will be achieved by 2010-11. Given that a new acting principal and a new chair of the board of management have been appointed, how confident are you that the college will break even by 2010-11?

The answer is similar to that to Mr Welsh's question. The section 22 reports are about the position at the end of the previous financial year. Our auditors are monitoring that now, but the current financial year ends in just a month's time, so it makes sense to wait for the outturn at that point rather than to second-guess plans that were put in place up to 12 months ago.

When will you see the accounts for this financial year, which is about to end?

We plan to produce for you at the turn of this year a report across the further education sector. That will pick up the financial health of the sector as a whole and specific colleges that have had problems, such as Inverness College and James Watt College, to assure members about the outturn position and to identify any new problems that may have emerged in other colleges since the end of the previous financial year.

The plan at James Watt College is to produce a small cash reserve by 2010-11, which is fine, but a deficit will continue to accumulate between now and then. Unless a big change occurs, even with the expected savings of £1.6 million in 2007-08, a further deficit of £2.3 million will be incurred. That will be on top of the existing deficit of £5.336 million and whatever deficit is incurred in the current financial year, which is as yet unaudited—I assume that it will be at least £2.5 million because savings were not expected. We are talking about a deficit that will amount to 25 per cent of annual expenditure by the time cash savings begin to be generated. Do I have that reasonably square in my head?

That is reasonably square. The challenge for the college is to remove costs or generate income in a way that brings its recurring income and expenditure back in balance while working with the funding council to agree how the accumulated deficit, which may need to increase to take account of matters such as restructuring costs, can be managed.

The funding council agreed emergency funding in 2006-07 to keep the college in operation. The recovery plan needs to take account of both requirements: the income and expenditure balance and the accumulated deficit. The plan is for that to start to generate a cash surplus by 2010-11. The way in which the accumulated deficit is dealt with is also subject to discussion with the funding council.

As the deficit seems to be approaching £10 million, and as there are unquantified restructuring costs on top of that, which might affect any eventual savings, it seems that someone will at some point ask for some massive debt to written off. I cannot see how this can be done; is it possible for an organisation such as an FE college to work down a deficit that is 25 per cent of annual expenditure?

Bold figures such as those suggest that there is a significant problem to be managed. The council has put in place anticipated savings for this financial year, in advance of the financial recovery plan. We have not yet seen how those two things will interact and affect the accumulated deficit. That is always the difficult question around recovery in such situations. The answer is to see what the 2006-07 outturn looks like and what signals that sends for the future recovery plan.

So we will come back to that in the spring.

Caroline Gardner indicated agreement.

I am sure that we want both colleges to get back on an even financial keel. Is any account taken in the recovery plans for the two colleges of the impact of the measures on teaching and learning, or is that outwith the scope of this kind of analysis?

That is very much part of the funding council's focus when it works with individual colleges. It is trying to achieve not just financial recovery, but financial recovery that allows the college to keep delivering services to students and employers in the local area, which forms part of the overall strategy for FE in keeping the economy of Scotland developing.

Colleges' approaches will differ. The question for Inverness is how a college in a rural area can deliver services flexibly but cost-effectively. The questions for James Watt College are different. The importance of delivering services is the focus of the funding council's development directorate when it agrees improvement and recovery plans.

I take it from that that the recovery plans do not indicate any adverse impact on learning and teaching. I am sorry to probe you on that.

The plans aim to manage the impact. It is difficult for us or for the funding council to say that there will be no impact; it is a question of how it is managed, taking into account the available resources and the number of students in the colleges' catchment areas.

I stay in Greenock, not too far from James Watt College. I know how important the college is to the local community, economically and socially. There have been many problems at the college in recent years, and letters from concerned academic staff and students have highlighted various issues.

You will report on the financial health of the whole FE sector. Are you able to tell us which financial elements of the funding council you will examine?

This will be our third overview report on the further education sector since 2000. The aim for all such reports is to pull together the accounts of all 44 colleges—it is 43 now, I think—to give a picture of the health of each of them and the trends across the sector. We are considering colleges' overall financial performance, how they are performing against the funding council's indicators of financial health and other aspects of the quality of the further education that they exist to provide. We can give you copies of the previous report, for information, if that would be useful. The aim is to pull together a picture for the whole of Scotland rather than ask you to look at 40-odd separate sets of accounts.

A letter that I received says:

"something must be done about the SFC and the rules governing college principals, who become power mad dictators as soon as they are appointed."

Will you audit the Scottish funding council and try to establish what its role is, what its function should be and is, and how it manages the funding that goes to colleges and the likes of the so-called power-mad dictators?

I could not possibly comment on the point about power-mad dictators.

If you could find a measure for power madness, perhaps it could be widely applied.

I hope that that would not be necessary, convener.

We have considered governance in the sector several times, not just in the previous overview reports that I mentioned but in relation to Inverness College and, before that, Moray College, where there were also problems. That throws up questions about the governance of colleges and the relationship between the funding council and the Executive.

I am sure that you are familiar with the report on James Watt College that the funding council's further education development directorate published in December 2006. That report identified questions about the role of the principal, the quality of the next tier of management, and the strength of the board of management. That is a common pattern where such problems have arisen. We will refer to the findings of our previous work and the funding council's work, but we will not directly consider the matter in the report that we will publish around the turn of the year. It is more a question of looking for patterns of warning signals before problems emerge.

Your report on James Watt College states:

"A new Acting Principal was appointed in October 2006".

Is he or she still acting principal?

I do not know. We will update you on that in the overview report on progress at James Watt College and Inverness College.

The previous report mentioned the importance of having a principal who gives a lead. I wonder whether there is an issue about establishing a permanent position.

You are right about the importance of the principal. I do not know the current position at the college.

The situation is worrying. Without bank overdraft support, it is simply advance-fed grants and anticipated savings, which might not be achieved, that will produce a small cash surplus in four years' time. This must be one of the most serious cases before us. Is it possible for the committee to be kept informed as the results come out?

When the committee meets again in September, our auditors will have just started their audit work for the financial year that is about to finish. We can certainly give you an informal briefing on the findings from that work then, and let you know when the audits will be completed.

That would be appreciated.

As agreed, we will move into private session for the remaining items.

Meeting continued in private until 12:11.