Government commissioned college finance review to slam ESFA

A government commissioned review is set to heavily criticise the Education and Skills Funding Agency and their intervention regime for failing to spot when colleges get into finance trouble, FE Week understands.

Dame Mary Ney, who had a 40-year career in local government, was commissioned to undertake the review in August after the FE Commissioner’s team found Hadlow College, now in administration, had an ESFA financial health score of ‘good’.

It is expected that Ney will be particularly critical of the calculations the ESFA uses to determine the financial health scoring and grading.

We need to know more than just what the single score is

She will argue that had the agency’s formula been more robust, it could have intervened in college failures, such as that of Hadlow, much sooner.

The Ofsted grade one college has been subject to government investigations after financial irregularities were uncovered. These included submitting partial information to the ESFA in order to secure a ‘good’ financial health rating. However, according to the FE Commissioner, had the ESFA looked at their published accounts they would have rated them as ‘inadequate’.

The agency’s scoring system allows colleges to self-grade themselves by inputting three measures: one based on cash, another on debt and then margin.

This set of metrics then formulates an overall financial health grade of ‘outstanding’, ‘good’, ‘requires improvement’ or ‘inadequate’.

Julian Gravatt, deputy chief executive for the Association of Colleges, said this “broadly balanced” system has been around since 1994 but is in need of change.

“A college that is reporting a big loss or got low points on their current assets, or high debt, that is all a flag. But the big issue is you have got to be certain the figures are correct, which was clearly a bit of a Hadlow issue,” he told FE Week.

“What I think is a problem is that we are not a sector full of financial analysts. Ttere is a slight danger that a college thinks their rating is fine, so nothing more needs to be done.

“We need to know more than just what the single score is ­– you need to understand what contributes to it. It is useful as one of the things in the picture, but it is not enough.”

The ESFA appears to be aware of its trouble in overseeing college finances, and has already started to make changes ahead of Ney’s report.

It was announced in September that college financial returns, which historically have been submitted at least twice a year, will from this month be consolidated into a single annual return.

The ESFA claimed this would help college governors­– and the agency – “spot signs of declining financial health and ensure preventative action can be taken at an earlier stage”.

But principals were critical of the move, with Bedford Colleges Group boss Ian Pryce commenting at the time: “You don’t wait until you hear the football results and learn your team lost 10-0 as a basis for preventing problems and poor performance. You spot things early by developing strong human relationships.”

We are not a sector full of financial analysts

On December 23 the ESFA published a new integrated financial model for colleges (IFMC), which replaced the agency’s modelling for financial plans, financial record, and cash flow forecast.

Gravatt said the new spreadsheet, which all 248 colleges must have completed by February 28, will collect more cash data and thus give the ESFA a wider overview of a college’s financial health.

“This is a spreadsheet that those colleges applying for restructuring funding – about 10 per cent of the sector – had to fill in,” he explained. “But it ­is now being extended to 100 per cent of colleges,  asking them to predict their funding for up until July 2022.”

He added that while the financial health scoring and grading hasn’t changed, the ESFA has “promised that they are going to look at changing the system”.

Ney’s report will be published ahead of a National Audit Office’s value for money review on the management of colleges’ financial sustainability, which launched in August.

FE Week understands the government’s audit watchdog will release their verdict in the summer.

The DfE declined to comment on the upcoming Ney report.