Tiny team keeps tabs on the big spenders

September 4, 1998

Has the Higher Education Funding Council for England the power and money for the job, Phil Baty asks

JUST seven auditors and two support staff at the Higher Education Funding Council for England are employed to safeguard the Pounds 3.8 billion of public money spent in 140 English universities each year.

This tiny audit team, with an annual budget of just Pounds 569,000, has to work with a sector in which every institution is autonomous and where meddling by outsiders is not welcomed. As the government conducts its Treasury-led quinquennial review of HEFCE, some are asking if the funding council has enough power and sufficient resources to hold universities to account.

John Rushforth, HEFCE chief auditor, said: "When we are asked if we need more power, our answer is always 'no'. Institutions must be independent and clearly separate from government if their role is to challenge received wisdom."

HEFCE has a legal duty to ensure that higher education institutions "provide value for money" and that the money is "used for the intended purposes". This is done through regular institutional visits. Each institution is visited for one week once every three years.

Is this really enough?

"Yes," said Mr Rushforth. "All our team are professional auditors. They spend a week on site. They get a good feel."

But the visits "are reviews, not audits", Mr Rushforth made clear. Rather than look for accounting anomalies or get involved in the minutiae of an institution's book-keeping, the auditors satisfy themselves that the right mechanisms, such as audit committees and finance officers, are in place. Few of these mechanisms are mandatory.

Beyond some basic requirements (see below), there is little common to all. "The sector is so diverse," said Mr Rushforth. "We can apply a set of principles about accountability, but we cannot be too prescriptive."

But if the right mechanisms are not in place, options are limited. Beyond its absolute power to withhold a university's entire grant - an almost unthinkable last resort that only hurts the students and staff - the auditors have to rely on a mixture of carrot and stick, where carrots are the preferred option.

"If the institution chooses not to act on our advice we will very rarely say they must," said Mr Rushforth, "unless there is an unacceptable financial control weakness or a blatant breach of conditions of grant." The team relies heavily on a notion of respect. "We have a group of folk who have been around and have a very rich source of expertise. Institutions are never very thrilled to get a visit, but in the end they find it helpful. They respect us."

When the carrots fail to entice a stubborn institution into action, the auditors do have some sticks.

"If the University of Dufshire decides it doesn't want an audit committee, we wouldn't tolerate that. We would start with a discussion, but we have a range of escalating options because in the end there are conditions of grant that an institution must fulfil."

HEFCE will seek to avoid this. "First we may ask if the institution is a fit body for discretionary funding competitions. If we thought it wasn't we would exclude it from bidding. If the matter were very serious, we will threaten not to pay its funds. The threat should be sufficient. It is like a nuclear deterrent, not something we'd chose to use." With one-off allegations of sleaze, HEFCE must always listen, but it will tend to steer clear of the grey areas where public funds are not directly threatened, such as in cases of quality or employment disputes. Institutional autonomy is paramount and the emphasis is on partnership. Partnership also means keeping problems and findings out of the public domain.

Mr Rushforth's deputy, Paul Greeves, said: "Governing bodies are the ones to hold management accountable, not the press. It is very important that things are exposed at board level. We are not seeking public confrontation, but that does not mean things are cosy."

But if governors are the ones to hold managers to account, who holds the governors to account? "It is always a problem," admitted Mr Rushforth. "If we accept that institutions are independent, we cannot say we want to control governors."

Mr Rushforth denied that this is frustrating for a former head of a local government audit commission, a very adversarial, very public watchdog. He has become a convert to a partnership approach. "You can get things done much more quickly, cheaply and effectively.

The small budget gives a false picture, he said. "We don't do it like this because we have small resources, we do it because it is effective."

But lack of resources can create conflict. "Major allegations take time, effort and money to investigate but often only a trivial sum of money is involved. But if we have an issue we will sort it. If that needs extra resources we will find them."

HOW THE CHECKS AND CONTROLS ON HIGHER EDUCATION FUNDING ARE MONITORED

What does the Higher Education Funding Council for England's audit service do?

The audit service must "evaluate all control arrangements, financial and otherwise, of the institutions funded by the council".

This is done largely through the regular, cyclical three-year reviews of institutions, intended to "gain an overview of the adequacy and effectiveness of the internal control arrangements in place", measured against an Audit Code of Practice.

The HEFCE audit team can largely only recommend action. The council can force action, as a last resort threat of withholding cash if an institution is breaching mandatory elements of the code of practice, which are conditions of its grant.

Mandatory elements of the code of practice:

* An institution's governing body must designate a principal officer (usually the vice-chancellor) who would appear before the House of Commons on matters relating to the use of funds provided by HEFCE.

* Governing bodies must take "reasonable steps" to ensure sound internal controls within an institution.

* Each institution must have an audit committee - with no members with executive authority - which will produce an annual report and satisfy itself that satisfactory arrangements are in place to promote "economy, efficiency and effectiveness".

* There must be an effective internal audit function, with access to all records.

* The HEFCE auditors must be given access to all internal records, information and assets.

* The designated officer (vice-chancellor) must report any serious weaknesses, "significant frauds", or major accounting breakdowns to the chair of the institution's audit committee or HEFCE.

Voluntary elements of the code of practice that HEFCE cannot insist on include:

* Governors' audit committees should consist of at least three members of the governing body, and should be able to co-opt non-governing body members, with equal status. It should meet at least twice a year.

* The internal audit service should have formal terms of reference, set by the governors, not the institution's executive, and should produce a written report.

* The internal audit service should have the right to review, appraise and report on the extent to which assets and interests are safeguarded from fraud.

* External auditors should be registered with one of the appropriate professional bodies.

Value for money

HEFCE audit service promotes value-for-money in the sector. This remit goes only as far as producing advice and guidance to the sector, through published reports of studies.

"We cannot ensure value-for-money," said Mr Rushforth. "First, because it is a subjective subject, and second, because there are 140 institutions and it would be impractical. The guiding principle is to ensure institutions are self-reliant, not to create a raft of rules to be policed. Institutions are keen to make the best use of their money."

HEFCE auditors support a UK value for money steering group, which conducts and publishes studies in value for money in different areas for governors and senior managers. HEFCE works with the Scottish and Welsh HE funding councils and the Department of Education, Northern Ireland.

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