Over the summer the annual accounts of the Skills Funding Agency (SFA) were published (click here). If anyone was interested in them, they would have read that these accounts were qualified by the SFA’s auditors – the National Audit Office. While generally in life qualifications are something to be sought, qualified accounts are a bad (and unusual) thing.

The National Audit Office judged in its qualified audit opinion: “the financial statements do not give a true and fair view of the state of affairs of the Skills Funding Agency and its subsidiaries as at 31 March 2011”

The auditors believed that financial reporting standards required that the SFA should have “consolidated” the accounts of further education colleges as “subsidiaries” into the agency’s own accounts because the SFA has control over colleges. (That control is in the form of the borrowing consents which otherwise independent corporation have to seek.)

The SFA declined to do this given the practical challenges of incorporating the accounts of every FE college for the year to 31 March 2011 – a task further complicated by colleges accounting to the 31 July each year on the basis of a different set of reporting standards.

Does any of this matter? Not too much in itself – but it does highlight a wider issue and a potential threat.

In his report on Internal Control, Geoff Russell, as SFA’s chief executive’s noted how the accounting treatment of colleges poses an “unexpected risk” threatening “to contradict the Government’s simplification and cost reduction policy”. This arises both from international financial reporting standards and from last October’s designation of colleges as public sector bodies by the Office for National Statistics (ONS).

In terms of cost-benefit analysis, there is no benefit to colleges from such a return to balance the cost.”

While Geoff Russell does not spell it out, what that means in practice is that in the future FE colleges might be asked to provide the information necessary for the SFA to consolidate all those figures into its own accounts. This would mean a Spring return in addition to the Finance Record and the Financial Plan returns. Inevitably there is a compliance cost for colleges as well as a resource required at the SFA where presumably a shrinking staff could be doing something more useful than chasing accounts and crunching numbers. In terms of cost-benefit analysis, there is no benefit to colleges from such a return to balance the cost.

Similar issues are posed for Sixth Form Colleges although the ONS classification treated them as local government bodies as, until the Education Bill becomes law, councils grant borrowing consent. That difference meant that the Young People’s Learning Agency avoided the embarrassment of qualified accounts (click here).

The DfE and BIS are promising to deal with these issues but the promised “freedoms” may not be enough to remove threat of some more new red tape.

Bob Deed is a financial consultant in the college sector tweeting as @deedconsulting