12 October 2004

To	Heads of HEFCE-funded higher education institutions Heads of universities in Northern Ireland

Direct Line	0117 931 7300
Direct Fax	0117 931 7203

Circular letter number 19/2004

For further information contact your HEFCE assurance consultant, finance adviser, or auditor

Dear Vice-Chancellor or Principal

The HEFCE's Accounts Direction to higher education institutions for 2004-05

I am writing to let you know that on 16 September 2004 the HEFCE Board reviewed its Accounts Direction to HEIs on preparing their financial statements for 2004-05. This has changed from the 2003-04 version issued as Circular Letter 23/2003 in order to reflect the updated 'Accountability and Audit: HEFCE Code of Practice' (published in June 2004 as 2004/27) and clarify our expectations of the content of the statement on internal control in the light of revised guidance from HM Treasury and the Auditing Practices Board.

Accordingly, the HEFCE's direction is that:

Higher education institutions are required to follow the 'Statement of Recommended Practice: Accounting for Further and Higher Education' (SORP), or any successor SORP, in the preparation of their financial statements for accounting periods beginning on or after 1 August 2004. In the case of an institution which is also a company limited by guarantee, this direction is subject to the requirements of the Companies Acts.
Institutions are required to follow the accounting treatment for inherited liabilities as set out in 'Accounting in Higher Education Institutions', issued by the Accounting Standards Group of the British Universities Finance Directors Group (BUFDG) in March 1995, or as subsequently revised.
In relation to corporate governance:
1. Institutions are required to ensure that they maintain a sound system of internal control and that the following key principles of effective risk management have been applied.
  Effective risk management:
  - covers all risks - governance, management, quality, reputational and financial - but is focused on the most important key risks
  - produces a balanced portfolio of risk exposure
  - is based on a clearly articulated policy and approach
  - requires regular monitoring and review, giving rise to action where appropriate
  - is managed by an identified individual and involve the demonstrable commitment of senior governors, academics and officers
  - is integrated into normal business processes and aligned to the strategic objectives of the organisation.
2. Institutions are required to review at least annually the effectiveness of their system of internal control. In carrying out an assessment of the system it is suggested that institutions refer to the HEFCE guidance 'Risk management - a guide to good practice in higher education institutions' (HEFCE 01/28).
3. Institutions are required to include in their annual accounts a statement on internal control (corporate governance). In formulating their disclosure statements on corporate governance it is recommended that institutions refer to the framework given in the BUFDG guidance 'Corporate Governance in Higher Education'. As a minimum these disclosures should include an account of how the following broad principles of corporate governance have been applied:
  - the identification and management of risk should be an ongoing process linked to the achievement of institutional objectives
  - the approach to internal control should be risk-based, including an evaluation of the likelihood and impact of risks becoming a reality
  - review procedures must cover business, operational and compliance as well as financial risk
  - risk assessment and internal control should be embedded in ongoing operations
  - the governing body or relevant committee should receive regular reports during the year on internal control and risk
  - the principal results of risk identification, evaluation and management review of its effectiveness should be reported to, and reviewed by, the governing body
  - the governing body acknowledges that it is responsible for ensuring that a sound system of control is maintained and that it has reviewed the effectiveness of the above process
  - where appropriate, set out details of actions taken or proposed, to deal with significant internal control issues (see Annex C).
4. In disclosing their policy on corporate governance it is recommended that institutions use the model disclosure notes included in the BUFDG guidance 'Corporate Governance in Higher Education' as the basis for their corporate governance statement. It is recognised that the model note may need to be adapted to more accurately reflect the different internal structures and systems in place in each individual institution.
5. All institutions are required to make a full disclosure statement on corporate governance covering the period 1 August 2004 to 31 July 2005 and up to the date of approval of the annual accounts.
6. An auditor might consider whether to report by exception in the opinion section of their audit report. This might be appropriate if, for example, the auditors had grounds for believing the statement made did not reflect their understanding of the process undertaken. In most circumstances the reporting by exception would result in an 'other matter' paragraph and would not qualify the audit opinion.
7. However, in other circumstances it could qualify the opinion, since by not complying with the Accounts Direction the institution would be in breach of the financial memorandum (see 'Model financial memorandum between HEFCE and institutions' 2003/54) and therefore not 'in accordance with the financial memorandum' (as per 'Accountability and Audit: HEFCE Code of Practice' Annex I, Opinion iii). This could be the case, for example, if no statement was included. Furthermore a qualification could be made if weaknesses in the internal control and risk management arrangements were such that the auditor was unable to provide a view on the truth and fairness of the financial statements.
Institutions are required to ensure that their contracts for external audit make provision for an opinion on whether the institution has applied income, where appropriate, in accordance with the financial memorandum, and whether Funding Council grants have been used for the purposes for which they were received. Suggested wording is available as Annex I in 'Accountability and Audit: HEFCE Code of Practice' (HEFCE 2004/27).
Institutions are required to disclose the following:
1. The actual total emoluments of the vice-chancellor or director/principal including bonuses (but no details of bonuses earned). Further details are given at Annex A.
2. The remuneration of higher paid staff in bands of £10,000 from a starting point of £70,000. External payments should be included within the remuneration disclosed. Payments received from the NHS will normally be in connection with the management of the affairs of the university or college and should therefore be included as an external payment. There may, however, be cases where royalties or other payments are received which are regarded as outside the affairs of the institution. Disclosure is also required for those staff who joined part way through a year but who would have received remuneration in these bands in a full year.
3. Details of any compensation paid or payable to the vice-chancellor or director/principal, or higher paid staff whose annual remuneration exceeds £70,000, as detailed at Annex B.

The Accounts Direction will be reviewed annually. The 2004-05 Accounts Direction will remain in force unless institutions are notified otherwise. We recommend placing a copy of this letter and the annexes before your Finance and Audit Committee for information.

Any matters arising from this letter should be referred to your HEFCE assurance consultant, finance adviser or auditor.

Yours sincerely

Sir Howard Newby
Chief Executive

Download

Annex A Emoluments of vice-chancellors or directors/principals in higher education
Annex B Compensation for loss of office
Annex C Significant internal control issues
[ MS Word 61K | Zipped Word 11K | Adobe PDF 39K | Zipped PDF 29K ]

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