HEFCE's Accounts Direction to higher education institutions for 2009-10 financial statements

July 2009 | ref: Circular letter 14/2009

To:

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

Dear Vice-Chancellor or Principal

1. I am writing to inform you of the Accounts Direction to higher education institutions (HEIs) on preparing financial statements for 2009-10.

2. There are no additions to the 2008-09 version issued as HEFCE Circular letter 16/2008.

3. Accordingly, HEFCE’s direction is that:

HEIs are required to follow the 'Statement of Recommended Practice: Accounting for Further and Higher Education' (SORP)¹, or any successor to the SORP, in the preparation of their financial statements. In the case of an HEI that is also a company limited by guarantee, this direction is subject to the requirements of the Companies Act.
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 2009/14) in March 2009. The voluntary Governance Code of Practice contained in this CUC guidance recommends that HEIs should report in the corporate governance statement of their annual audited financial statements that they have had regard to the Code, and that where an HEI’s practices are not consistent with particular provisions of the Code an explanation should be published in that statement. HEIs are reminded that adoption of the CUC Governance Code of Practice, with the principles of the Code adapted as appropriate to each HEI’s character, is an important factor in enabling HEFCE to rely on self-regulation within HEIs and hence reduce the accountability burden.
2. HEIs are required to maintain a sound system of internal control and to ensure that the following key principles of effective risk management have been applied. Effective risk management:
  - covers all risks – including governance, management, quality, reputational and financial – but is focused on the most important 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. HEIs are required to review at least annually the effectiveness of their system of internal control.
4. HEIs are required to include in their annual financial statements a statement on internal control (corporate governance). In formulating their statements, HEIs should refer to best practice guidance, including guidance from the Institute of Chartered Accountants in England and Wales and the British Universities Finance Directors Group (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, details of actions taken or proposed, to deal with significant internal control issues should be set out (see Annex C).
5. HEIs are required to make a full statement on corporate governance covering the period 1 August 2009 to 31 July 2010 and up to the date of approval of the annual financial statements.
6. External auditors 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 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. vii. 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', 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.
The date for submission of institutions1 2009-10 financial statements is 1 December 2009, with earlier submissions welcome.
HEIs are required to ensure that their contracts for external audit make provision for an opinion on whether the HEI 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.
HEIs are required to disclose the following:
1. The actual total remuneration of the head of institution 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 HEI 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 HEI. 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 head of institution or staff whose annual remuneration exceeds £100,000, as detailed at Annex B.
Statutory Instrument 2008 No 489 ‘The Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) Regulations 2008’ 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 6 April 2008 and so is required, for those HEIs to which company law applies, from financial year 2008-09 onwards. The Statutory Instrument can be viewed at the Office of Public Sector Information web-site.

4. The Accounts Direction is reviewed annually. The 2009-10 Accounts Direction will remain in force unless HEIs are notified otherwise. We recommend providing copies of this letter and the annexes to the HEI’s Finance and Audit Committees.

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

Yours sincerely

Sir Alan Langlands
Chief Executive