The SFA’s qualified accounts, colleges and red tape

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

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One comment

  1. Stephen Forster

    Clearly, the Government don’t want the debt the FE sector has accumulated to be added to the PSBR – at a time when they are trying to reduce the nation’s debt burden. The issue is that the agencies and Ministers have powers which mean they exert a ‘significant influence’ over FE colleges, for example the right to dissolve a Corporation or appoint additional governors. If the Secs of State are prepared to give up these powers in the name of additional freedoms for the sector, all well and good. I suspect there will be a temptation to retain at least the right to dissolve a Corporation and intervene in mergers which may not satisfy the ONS and NAO.

    Technically, there seems to be no reason why Colleges should be faced with an additional burden. If a company needs to consolidate the results of a ‘related entity’ (one in which it has a significant influence, but does not own a majority shareholding) it simply brings in the most recent set of financial results prior to its own year end. The implied threat of loss of independence and more bureaucracy for the sector may be overstated in my view.