To:

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

Dear Vice-Chancellor or Principal

HEFCE's Accounts Direction to higher education institutions for 2008-09 financial statements

I am writing to inform you that on 8 May 2008 the HEFCE Board reviewed its Accounts Direction to higher education institutions (HEIs) on preparing their financial statements for 2008-09.

There are no changes from the 2007-08 version issued as HEFCE Circular Letter 22/2007, except to note that a revised Financial Memorandum and HEFCE Code of Practice will be effective from 1 August 2008 (HEFCE 2008/19).

Accordingly, HEFCE's direction is that:

1. Higher education institutions are required to follow the SORP, or any successor to the SORP, in the preparation of their financial statements. It is noted that a revised version of the SORP was effective from 1 August 2007. 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.
2. In relation to corporate governance:
   1. The Committee of University Chairmen (CUC) issued the 'Guide for Members of Higher Education Governing Bodies in the UK' (HEFCE 2004/40) in November 2004. The voluntary Governance Code of Practice contained in this CUC guidance says that institutions should state that they have had regard to the code, and should explain in the corporate governance statement where the institution's practices are not consistent with the provisions of the code. Institutions are reminded that adoption of the CUC code of practice, with the principles of the code adapted as appropriate to each institution's character, is an important factor in enabling HEFCE to rely on self-regulation within HEIs and hence reduce the accountability burden.
   2. 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. However it 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
      • needs to be 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.
   3. 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 on risk management in the web-only publication 'Risk management in higher education: a guide to good practice' (HEFCE 2005/11) and the complementary publication 'Risk management - A guide to good practice for higher education institutions' (HEFCE 01/28).
   4. Institutions are required to include in their annual financial statements a statement on internal control (corporate governance). In formulating their disclosure statements on corporate governance it is recommended that institutions refer to best practice guidance, including from the Institute of Chartered Accountants in England and Wales and the BUFDG. 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 (Annex C).
   5. In disclosing their policy on corporate governance it is recommended that institutions refer to the BUFDG guidance on Corporate Governance for Higher Education.
   6. All institutions are required to make a full disclosure statement on corporate governance covering the period 1 August 2008 to 31 July 2009 and up to the date of approval of the annual financial statements.
   7. 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.
   8. 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 ('Model Financial Memorandum between HEFCE and institutions' as revised in 2008, HEFCE 2008/19) and therefore not 'in accordance with the financial memorandum'. 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.
3. The date for submission of institutions' 2008-09 financial statements is 1 December 2009, with earlier submissions welcome from those able to do so. HEFCE Circular letter 15/2008 'Single conversation accountability process for 2008' refers to this and gives further information.
4. 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. Guidance on wording is available in paragraph 92 of Annex B in HEFCE 2008/19.
5. Institutions are required to disclose the following:
   1. The actual total emoluments of the vice-chancellor or director/principal including bonuses (but not 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 £100,000. 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 £100,000, as detailed at Annex B.
6. Statutory Instrument SI 2005 No 2417 'The Companies (Disclosure of Auditor Remuneration) Regulations 2005' legally requires detailed analysis and disclosure within financial statements of audit and other fees paid to external auditors. This came into force for financial statements for financial years commencing from 1 October 2005, and so has been required, for those institutions to which company law applies, from financial year 2006-07 onwards. The Statutory Instrument can be viewed at Office of Public Sector Information web-site. Guidance on disclosure in accordance with the Statutory Instrument is available on the ICAEW web-site (see TECH 04/06).

The Accounts Direction is reviewed annually. The 2008-09 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 Committees for information.

Any matters arising from this letter should be referred to your HEFCE assurance consultant, finance adviser, or assurance adviser. Contact details are on our web-site.

Yours sincerely

Professor David Eastwood
Chief Executive

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