1. I am writing to inform you of a revision to HEFCE’s Accounts Direction for 2011-12; and of the Accounts Direction to higher education institutions (HEIs) on preparing financial statements for 2012-13.
Revision of HEFCE’s Accounts Direction for 2011-12 financial statements
2. The HEFCE Accounts Direction for 2011-12 remains as published in ‘HEFCE’s Accounts Direction to higher education institutions for 2011-12 financial statements and revised Accounts Direction for 2010-11’ (HEFCE Circular letter 20/2011), but with a revision.
3. Paragraph 7 of the previously published accounts direction stated that:
‘Following good practice in private sector corporate governance HEFCE is reflecting on the scope of a going concern disclosure to be made by HEIs in 2011-12 financial statements. This will be informed by the outcome of the current inquiry into going concern assessments by the Financial Reporting Council. The Accounts Direction for 2011-12 will be revised in this respect in the light of the Financial Reporting Council inquiry.’
4. As the final recommendations of Lord Sharman’s inquiry on going concern and liquidity risk were not reported until June 2012, the sector will not be required to implement them in its 2011-12 audited financial statements. A number of HEIs are piloting the implementation of the Financial Sustainability Strategy Group’s report ‘Assessing the sustainability of higher education institutions’ (June 2011). This pilot exercise will take into account any response from the Financial Reporting Council following Lord Sharman’s final report, and this will inform any going concern disclosure to be required across the sector in 2012-13 audited financial statements.
HEFCE’s Accounts Direction for 2012-13 financial statements
5. HEFCE’s direction is as follows.
Statement of Recommended Practice: Accounting for Further and Higher Education
6. HEIs are required to follow the ‘Statement of Recommended Practice: Accounting for Further and Higher Education’ (SORP), or any successor to the SORP, in the preparation of their financial statements. The latest version of the SORP (2007) is available from the Universities UK web-site.
7. 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.
8. The financial statements shall be signed by the accountable officer and by the chair or one other member of the governing body appointed by that body.
Going concern and liquidity risk
9. Following good practice in private sector corporate governance HEFCE is reflecting on the scope of a going concern disclosure to be made by HEIs in 2012-13 financial statements. This will be informed by the response from the Financial Reporting Council following Lord Sharman’s inquiry on going concern and liquidity risk. It will also be informed by the work of HEIs piloting the implementation of the Financial Sustainability Strategy Group’s report on ‘Assessing the sustainability of higher education institutions’. The Accounts Direction for 2012-13 will be revised in respect of this.
Corporate governance and internal control
10. The voluntary Governance Code of Practice contained in the Committee of University Chairs’ (CUC’s) ‘Guide for Members of Higher Education Governing Bodies in the UK‘ (HEFCE 2009/14) recommends that HEIs 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.
11. 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 minimise the accountability burden.
12. 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 governors, academics and officers
- is integrated into normal business processes and aligned to the strategic objectives of the organisation.
13. HEIs are required to review at least annually the effectiveness of their system of internal control.
14. 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 British Universities Finance Directors Group. 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).
15. HEIs are required to make a statement on corporate governance covering the period 1 August 2012 to 31 July 2013 and up to the date of approval of the audited financial statements.
Date of submission to HEFCE of audited financial statements
16. The latest date for submission of HEIs’ 2012-13 audited financial statements is 1 December 2013. Earlier submission is very welcome.
External audit requirements
17. HEIs are required to ensure that their contracts for external audit make provision for an opinion on whether the HEI has applied funds provided by HEFCE, where appropriate, in accordance with the Financial Memorandum, and whether funds from whatever source including funding council grants have been used for the purposes for which they were received. Guidance on wording is available in paragraph 71 of Annex B in ‘Model Financial Memorandum between HEFCE and institutions: Terms and conditions for payment of HEFCE grants to higher education institutions’ (HEFCE 2010/19).
Remuneration of higher-paid staff
18. HEIs are required to disclose the following:
- The actual total remuneration of the head of institution including bonuses (but not details of bonuses earned). Further details are at Annex A.
- The remuneration of higher-paid staff in bands of £10,000 from a starting point of £100,000. External payments should be included. Payments received from the NHS will normally be in connection with the management 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 outside the affairs of the HEI. Disclosure is required for staff who joined part-way through a year but who would have received remuneration in these bands in a full year.
- Details of any compensation for loss of office paid or payable to the head of institution or staff whose annual remuneration exceeds £100,000, as detailed in Annex B.
Charities Act 2011
19. The following information should be included in the HEI’s audited financial statements and related reports:
- The charitable status of the HEI.
- The trustees who served at any time during the financial year and until the date the financial statements were formally approved.
- A statement that the charity has had regard to the Charity Commission’s guidance on public benefit.
- A report on how the HEI has delivered its charitable purposes for the public benefit.
- Information about payments to or on behalf of trustees, including expenses; payments to trustees for serving as trustees (and waivers of such payments); related party transactions involving trustees.
- For each paragraph 28 (ie linked) charity that has income in the year of £100,000 or more:
- The name and charitable purpose.
- The opening balance, income and expenditure for the year, and closing balance.
- For all other paragraph 28 charities:
- An analysis into appropriate groups (for example prize funds, bursary or scholarship funds, research support funds) stating the number of entities in each group.
- For each group: the aggregate opening balances, income and expenditure for the year, and closing balances. (Note: the terms ‘opening’ and ‘closing’ balance should be interpreted as total reserves where the paragraph 28 charity is an operating charity.)
20. The Accounts Direction is reviewed annually. The 2012-13 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.
21. Any matters arising from this letter should be referred to your HEFCE assurance consultant or assurance adviser.
Sir Alan Langlands