A new approach to financial regulation and oversight in the sector

Shortly after the scandal at Hadlow College Group was exposed, the government commissioned an independent review of college financial oversight. Dame Mary Ney’s report is due for publication imminently and FE Week has already reported that the Education and Skills Funding Agency is to be heavily criticised. Chris Todd, a chartered accountant and college principal, considers the problems and how to fix them

Having worked in further education for around 15 years, I’ve noticed that not much has really changed when it comes to financial regulation and oversight in the sector. It really is no different now to what is was 15 years ago. Colleges are still getting into financial trouble; there continue to be cases where the management override of controls is evident; and our regulator (the ESFA) remains fixated on financial data returns.

I’m a big fan of Game of Thrones and a particular quotation by Daenerys Targaryen springs to mind: “We need to break the wheel.”  Clearly, what we are doing isn’t working. It never has and it never will, until we start to think differently.

ESFA needs high-calibre, qualified staff who can rival the best of us

As someone who has quite an unusual range of experience in further education finance I feel well placed to comment on these issues. I’ve been an external and internal auditor at KPMG; I’ve worked at the Learning and Skills Council in provider financial management; and I’ve been a finance director in three educational institutions (two of them FE colleges). 

Not wanting to steal Dame Mary’s thunder, although I’m not sure her report will reach the same conclusions that I have, I thought it would be useful to share my three-point plan for improving financial regulation and oversight in the FE sector.

1. Use information that already exists to monitor the finances of colleges

The current approach employed by the ESFA to capture financial data is, in my opinion, not working.  Even with the introduction of the new Integrated Financial Model for colleges (IFMC) return, the focus remains on data harvesting, as opposed to interpretation and human-based interaction.  I may be wrong, but I’m not convinced the agency will make best use of this return when set against the significant workload that it creates.  

Here’s an idea: all colleges produce management accounts on a frequent and timely basis across the year – why not use these to review college financial performance and to exercise oversight?

Yes, the quality of management accounts will vary between colleges. However, poor-quality accounts are often an early warning sign that financial issues lie ahead. This in itself could be an early trigger for intervention. Additionally, reviewing the management accounts on a regular basis, could highlight areas where colleges are exhibiting early signs of distress (ie, unexpected cash-flow decline).

It strikes me as a fairly obvious solution and would provide more frequent and timely information to support the early identification of issues. It would also reduce the significant amount of time our finance colleagues spend each year completing these data returns, which provide little benefit or use to our own organisations. 

2. Employ the right people

I read with interest Dominic Cummings’ recent blog post encouraging “weirdos and misfits with odd skills” to apply for jobs within No 10. Whether you agree with this or not, my experience of the ESFA, and Civil Service more generally, is that they lack diversity in thinking. Many of the people I have come across in the Civil Service have worked there for the majority of their career, with limited exposure to the commercial world. 

If the ESFA is going to move to a model that is less reliant on data harvesting and rules-based transactional funding, to a model focused on intelligence, interpretation and relationship management, it will need to make sure it employs the right people.

Challenging a finance director or principal of an FE college on financial performance requires a specific range of skills. Too often, discussions around financial performance take place with non-financial staff, who do not have the experience or expertise to challenge effectively.

Fewer high-quality staff, paid at a level commensurate with the skills set and experience required, would add much greater value. Additionally, if their employment results in fewer colleges becoming financially distressed, then the public purse would benefit greatly. We may even be able to generate a favourable return on investment!

3. Focus on people and relationship management

There are lots of great people working in the ESFA, and in the North-East in particular, we enjoy a positive relationship based on mutual respect and trust. Unfortunately, however, the ESFA has become a shadow of its former self, with a huge decline in staffing numbers evident since 2011. To me, this is not sustainable and we need a fit-for-purpose funding agency that is properly funded going forward.

This is not to say that things were perfect back in the days of the Learning and Skills Council, but what did exist back then was an approach to financial regulation and oversight based on relationship management. We need this again but better, with high-calibre, qualified staff who can rival the best of us working in colleges across the country. Only this, will deliver the high-quality financial regulation and oversight colleges need.

To conclude, financial regulation and oversight will never remove financial failure altogether. There is always scope for human error and the management override of controls, but we must reach a position where the avoidable failures are identified at a much earlier stage. In my view, this is entirely possible if we take a fresh approach.