Committee
Audit Committee, 30 Apr 2008
30 Apr 2008 · S3 · Audit Committee
Item of business
“Financial overview of Scotland's colleges 2006/07”
Barbara Hurst (Audit Scotland):
Watch on SPTV
Set against that relatively positive picture of college finances, four colleges—Edinburgh's Telford College, Elmwood College, James Watt College and North Glasgow College—reported operating deficits totalling £1.9 million. However, with the exception of James Watt College, they had sufficient reserves to cover those deficits. The Auditor General has produced two section 22 reports on the 2006-07 accounts of James Watt College and Kilmarnock College. Those have only just been laid before the Parliament, so we will bring them to a future meeting. Six other colleges that have been the subject of section 22 reports in the past five years have, for the most part, improved their financial performance.Part 2 of the report explains that the overall improvement in financial performance is down to a number of factors. First, there has been an increase in public sector funding. Core grant funding has increased since 2002-03 by around £79 million, in cash terms, to £355 million in 2006-07. Capital funding has increased by £67 million in cash terms over the same period. While there has been some funding for growth in student activity, it has not been substantial. As a result, colleges have been able to concentrate on improving their overall financial position. The Scottish funding council launched a financial security campaign in 2002 and provided associated, ring-fenced funding of around £38 million to support that. In 2002, it launched its further education development directorate, which works largely through peer support. Colleges can draw on the support and experience of their peers in the sector. We spoke to people in different colleges who indicated that they appreciated that support, particularly when dealing with difficult issues or challenges.Although the improved financial position is encouraging, part 3 of the report outlines challenges for the sector over the next few years. First, while the overall funding that is allocated to colleges will not decrease over the period of the most recent spending review, the increases of recent years will not continue at the same level. The focus now for the college sector will have to be on financial sustainability. Colleges will need to respond to cost pressures associated with limited increases in public sector resources. Other funding sources and income streams are also likely to change, with reductions in European funding and uncertainties surrounding income streams from Scottish Enterprise and Highlands and Islands Enterprise due to the recent structural changes in those organisations. In addition, as we outline in the report, many colleges are proposing major estate or campus developments. That will be a significant area of spend, which presents management and financial challenges for the sector. Our report describes how some estate developments are linked to several colleges forecasting deficits in the next few years. One development that may help to alleviate that is sector-wide procurement. Other sectors in the public sector are aiming to create centres of excellence, and a centre of expertise for the college and university sectors has been established. However, progress has been slower than anticipated, and concerns about the level of subscription fees required to fund the centre's activities will need to be addressed if the sector is to secure the anticipated efficiencies.Colleges operate within relatively narrow margins. Our analysis found that, across colleges, the average operating surplus has grown in the past few years to around 3 per cent. However, that is relatively low and may not provide sufficient year-end flexibility. The potential consequence of operating within such narrow margins is that even relatively small changes in income or expenditure can move a college from an operating surplus to an operating deficit. That is shown in the report. Auditors found that the governance and management arrangements were generally sound both in the funding council and in individual colleges, although some relatively minor weaknesses were identified in some colleges.We highlight in our report two areas in which the committee has expressed interest previously. First, college boards of management should ensure that they have members with recent, relevant financial experience. Secondly, colleges should prepare good-quality draft accounts so that the audit can be completed smoothly and on time. That sounds very bureaucratic, but it is not meant to be. The issue is not one of auditors being under pressure. Rather, it is about the capacity of the finance function of colleges; the avoidance of additional fees should accounts not be presented in a good way; and, most important, the need for boards of management to have access to good sets of accounts and audit reports, so that they can consider their own role in the management of the college.The report highlights two colleges where there have been significant delays in the process. We also found that the accuracy of colleges' financial forecasts could be improved. That is important, because inaccurate forecasts could result in college boards of management making the wrong decisions or in the funding council providing support to the wrong colleges. The report is positive, in that we found that colleges are in better financial shape and that their overall financial performance has improved. That has been achieved through a combination of increased funding and peer support. The sector has genuinely learned some lessons from the difficulties that the previous Audit Committee highlighted. However, the sector faces a number of challenges, and it will have to respond to the cost pressures that are looming before it. As the Auditor General indicated, we are happy to take questions on the report.
In the same item of business
The Convener:
Lab
The second item on the agenda is the Auditor General for Scotland's report "Financial overview of Scotland's colleges 2006/07". The issue has significance th...
Mr Robert Black (Auditor General for Scotland):
Thank you, convener. I will be assisted in this briefing by Barbara Hurst, who will be master—I am not sure if one says mistress these days; I will say maste...
Barbara Hurst (Audit Scotland):
Set against that relatively positive picture of college finances, four colleges—Edinburgh's Telford College, Elmwood College, James Watt College and North Gl...
The Convener:
Lab
I want to ask about the issue of governance, which you touched on, and about leadership. From my local experience, I am struck by how, in the wider Renfrewsh...
Mr Black:
I will attempt to reply to the convener's questions and thoughts on those extremely important general issues before inviting Barbara Hurst to respond.I absol...
Jim Hume (South of Scotland) (LD):
LD
Overall, the position is improving, which page 4 of the report says has been achieved "by increases in funding". However, in paragraph 95 on page 20 concern ...
Barbara Hurst:
It is still too soon to say. In our report, we say that there is a risk of colleges being affected, but we do not know what will happen. As a result of the r...
George Foulkes (Lothians) (Lab):
Lab
This is an excellent report that shows the value of the whole process. The colleges' financial performance has improved under pressure from the committee and...
Mr Black:
I acknowledge Lord Foulkes's concerns about the performance of the governance function. It is not really possible for us to give members a strong evidence ba...
The Convener:
Lab
George Foulkes and I have raised issues of governance with you. I described boards as a fig-leaf for many principals. They appoint their board, so they can a...
Murdo Fraser (Mid Scotland and Fife) (Con):
Con
I want to ask about the points that are mentioned in paragraphs 23 to 27 of the report. I am rather concerned to see from the report—if I am reading it corre...
Mr Black:
The approach is not terribly satisfactory. Our difficulty is that the accounting standards allow different treatments, although we have encouraged the sector...
Barbara Hurst:
Mark MacPherson could give us an update and explain in a bit more detail.
Mark MacPherson (Audit Scotland):
Members will appreciate that accounting treatment is quite a technical issue. We appoint auditors to provide an independent opinion, so it is perfectly reaso...
Murdo Fraser:
Con
When is the situation likely to be resolved?
Mark MacPherson:
We cannot say with certainty when it will be resolved. There are still issues to be discussed and opinions to be resolved by different people. However, we ca...
Murdo Fraser:
Con
Yes. Thank you.
The Convener:
Lab
What would be required to ensure consistency? You mentioned that a degree of flexibility is open to people, but it seems rather absurd that different people ...
Mr Black:
We have suggested to the funding council that it would be helpful if it introduced a clear sector-wide policy to which the auditors could respond, but that i...
Stuart McMillan (West of Scotland) (SNP):
SNP
Barbara Hurst mentioned two reports—on James Watt College and Kilmarnock College—that have been laid before the Parliament. What are they about? Are they sec...
Barbara Hurst:
They are. They have been laid with the accounts of the two colleges and highlight for the committee issues that arose from the accounts. It is unfortunate th...
Stuart McMillan:
SNP
Do they relate to 2006-07 or 2007-08?
Barbara Hurst:
They relate to the 2006-07 accounts. We mentioned them in the report. They will come to the committee.
Stuart McMillan:
SNP
I was not sure whether they were in addition to what is mentioned in the report.
Barbara Hurst:
No. There is a more formal process to ensure that we bring matters to your attention.
Stuart McMillan:
SNP
I agree with what the convener said about James Watt College. Around a year and a half ago, I spoke at a rally in Greenock in support of the lecturers, staff...
Mark MacPherson:
I do not think that we can add anything to what is described in the report; the position has not changed. It is up to the college to move on and work accordi...
Sandra White (Glasgow) (SNP):
SNP
Overall, the report is very good. The deficit has moved to a surplus, which is excellent.I have a couple of questions, one of which follows on from the quest...
Mr Black:
One benefit of amalgamation is that the new body will have the critical mass to ensure that it has strong finance and leadership skills and stronger boards. ...
Mark MacPherson:
Our understanding is that the option is a shared campus and not an amalgamation of the colleges. What happens when the colleges share a campus is a matter fo...