Auditors issue warning about financial health of colleges

20 Jul 15

Government auditors are highlighting a likely rapid rise in the numbers of further education colleges that are in poor financial health.

In a report issued today, the National Audit Office said there were “fundamental structural problems” with colleges that might need to be tackled at a regional or sector-wide level.

In 2013/14, the FE college sector was in deficit for the first time, while the number of colleges with an operating deficit rose to 110 from 52 in 2010/11. The Skills Funding Agency assessed 29 colleges as being “financially inadequate”, meaning there was significant risk they would be unable to fulfil their contractual duties.

The NAO is predicting that the number of struggling colleges is set to grow quickly. According to SFA expectations, around 70 colleges could be deemed ‘financially inadequate’ by the end of the current financial year.

Many colleges have been over-optimistic in their financial forecasting and had failing to identify problems until a very late stage, the watchdog said. While some were making tough decisions in order to avoid financial difficulties, the skills to do this were in short supply.

It urged central government and the SFA to take a more strategic look at the financial health of the sector and better prioritise efforts at those colleges facing the most risk.

NAO head Amyas Morse said: “The further education college sector is experiencing rapidly declining financial health, and lacks a clear process to inform decisions about local provision.

“The Department for Business, Innovation & Skills and the Skills Funding Agency have taken steps to improve their analysis of risk in the sector, and to intervene more effectively in the colleges in most difficulty.

“But there needs to be more than a college-by-college approach, until then, the oversight and intervention arrangements cannot be regarded as value for money.”

In a statement, the Department for Business, Innovation and Skills said: “We are already implementing many of the report’s recommendations and will be going even further to strengthen the system by giving local areas a greater say over how and what young people are taught.

“These ongoing reforms are focused on achieving the best return on investment and we will provide up to an additional £25m this financial year to help support the creation of 3 million apprenticeships by 2020.”

• Morse has also qualified the accounts of the Skills Funding Agency for  2014/15 after it was found that payments totalling £49.9m had been made by the Agency to 17 Further Education colleges in advance of need.
The payments were part of a distribution by the Agency of £143 million of remaining capital funds to FE colleges by the end of March 2015.
However, auditors said the SFA did not sufficiently challenge the revised expenditure profiles submitted by colleges before deciding to make the remaining capital grant payments in February and March this year.
In addition, the Agency did not seek prior approval from HM Treasury for the payments in advance of need, as required by its Managing Public Money guidance.
As a result, the SFA has commissioned a review by the Government Internal Audit Service of the financial management and control arrangements relating to the College Capital Investment Fund.

  • Vivienne Russell

    Vivienne Russell is managing editor of Public Finance magazine and

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