Dear Vice-Chancellor or Principal
HEFCE’s Accounts direction to higher education institutions for 2016-17 financial statements
1. I am writing to inform you of HEFCE’s Accounts direction to higher education institutions (HEIs) on preparing financial statements for 2016-17. This direction only applies to HEFCE-funded HEIs. No new disclosures are required but I draw your attention to paragraph 14, which contains all disclosures required of exempt charity HEIs. (In previous Accounts directions exempt charity HEIs were referred to the HEFCE internet site for a complete listing of these disclosures.)
Statement of recommended practice – Accounting for further and higher education
2. HEIs are required to follow the ‘Statement of recommended practice: Accounting for further and higher education’ (SORP), or any successor to the SORP, in preparing their financial statements. The latest version of the SORP (2014) is available from the Universities UK website.
3. 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.
4. The financial statements must be signed by the accountable officer, and by the chair of the governing body or one other member appointed by that body.
Corporate governance and internal control
5. The voluntary Higher Education Code of Governance published by the Committee of University Chairs recommends that HEIs confirm their adoption of the Code in publicly available reports on corporate governance, such as annual reports or audited financial statements. In order to report that an institution has applied the Code a governing body needs to:
- Be confident that it has in place all of the primary elements. In order to do so it will be necessary for a governing body to meet or exceed the requirements of the supporting ‘must’ statements that prescribe essential components within the element.
- Explain where it considers a whole primary element or supporting ‘must’ statements inappropriate. In such cases the rationale should be clearly noted and the alternative arrangements summarised within an institution’s report on its use of the Code.
6. Adopting the Code, with the principles of the Code adapted 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.
7. 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 those of governance, management, quality, reputation and finance – but focuses 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 with the strategic objectives of the organisation.
8. HEIs are required to review at least annually the effectiveness of their system of internal control.
9. 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:
- Identifying and managing risk should be an ongoing process linked to achieving 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 risk as well as financial risk.
- Risk assessment and internal control should be embedded in ongoing operations.
- During the year the governing body or relevant committee should receive regular reports on internal control and risk.
- The principal results of risk identification, risk evaluation and the management review of their effectiveness should be reported to, and reviewed by, the governing body.
- The governing body should acknowledge 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 A).
10. The statement on internal control (corporate governance) must explicitly cover the period from 1 August 2016 to 31 July 2017, and up to the date of approval of the audited financial statements.
Date of submission to HEFCE of audited financial statements
11. The latest date for submission of HEIs’ audited financial statements for 2016-17 is Friday 1 December 2017. Earlier submission is welcome.
External audit requirements
12. HEIs are required to ensure that their contracts for external audit provide for an opinion on whether the HEI has applied funds provided by HEFCE, where appropriate, in accordance with the Memorandum of Assurance and Accountability (HEFCE 2016/12, www.hefce.ac.uk/pubs/Year/2016/201612/), 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 23 of Annex A of the Memorandum of Assurance and Accountability.
Remuneration of higher-paid staff
13. HEIs are required to disclose the following:
- The actual total remuneration of the head of institution, disclosing separately:
- Performance-related and other bonuses awarded for the financial year, including any deferred payment arrangements and separate disclosure of amounts waived.
- Any sums paid by way of expenses allowances (in so far as those sums are charged to UK income tax).
- The estimated money value of any other taxable benefits received by the head of institution, other than in cash (in particular company cars, subsidised loans including mortgage subsidies, and subsidised accommodation).
- Contributions to relocation costs.
- Any sums paid in respect of the head of institution under any pension scheme.
The HEI must show a sub-total excluding pension contributions and a total including them. Salary sacrifice arrangements should be described.
Where there is a change of head of institution (including an acting head of institution) either between years or during a year, details are to be shown separately for each person, and relevant start and finish dates given.
Pensions paid or receivable under an adequately funded pension scheme do not require disclosure.
- The number of higher-paid staff other than the head of institution whose emoluments received in the year (including taxable benefits in kind, but excluding compensation for loss of office and employer pension costs) fall in bands of £10,000 from a starting point of £100,000. Payments funded from external sources, including the NHS, should be included in emoluments. Royalties or other payments that are outside the affairs of the HEI do not count as emoluments for this purpose.
Disclosure is not required for staff who joined or left part-way through a year but who would have received emoluments in these bands in a full year.
- Details (see Annex B) of any compensation for loss of office paid or payable to the head of institution or to staff earning in excess of £100,000 per year.
Disclosures required by exempt charity HEIs
14. The following information should be included in the HEI’s audited financial statements and related reports:
- A statement about the HEI’s charitable status and objectives.
- A list of the trustees who served at any time during the financial year and until the date the financial statements were formally approved.
- A statement confirming whether the charity trustees have complied with their duty to have due regard to the guidance on public benefit published by the Charity Commission in exercising their powers or duties.
- A report on how the trustees have delivered their charitable objectives for the public benefit over the financial year. This does not need to be part of a separate public benefit report but can be included in the operating and financial review or in other sections as appropriate. However it is presented, the public benefit reporting must cover the following:
- A review of the significant activities undertaken by the charity to carry out its charitable purposes for the public benefit.
- Details of the charity's purposes and its strategic objectives.
- Details of the strategies adopted and activities undertaken to achieve those purposes and objectives.
- Details of the achievements of the charity by reference to the purposes and objectives that the trustees have set.
Further information on public benefit reporting can be found in the Charity Commission guidance.
- Provision in the notes to the financial statements of information on payments to or on behalf of trustees, including:
- Payments to trustees for serving as trustees:
- The amount of all payments and other benefits to each (named) charity trustee who is not an employee of the HEI. Each payment should be disclosed to the nearest £1.
- Details of all waived entitlements to such payments and other benefits.
- The legal authority for such payments and reason for remuneration.
- If there are no such payments, an express statement to that effect.
- Expenses paid to trustees:
- The total amount of expenses paid to or on behalf of the trustees as a whole rounded to the nearest £1,000. (For trustees who are employees, this only applies to expenses when serving as trustees.)
- The nature of the various expenses.
- The number of trustees involved.
- If there are no such expenses, an express statement to that effect.
It is not necessary to include routine expenditure on services provided for the trustees collectively, such as room hire or reasonable refreshments at meetings.
- Related party transactions involving trustees irrespective of whether or not they are undertaken on an arm's length basis:
- The name of the transacting related party or parties.
- A description of the relationship between the parties (including the interest of the related party or parties in the transaction).
- A description of the transaction.
- The amounts involved.
- Payments to trustees for serving as trustees:
- For each paragraph 28 (Charities Act 2011 Schedule 3) connected charity that has income in the year of £100,000 or more, the following:
- Its name and charitable purpose.
- The opening balance, income and expenditure for the year, and closing balance.
- For all other paragraph 28 charities, the following:
- 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 balance’ and ‘closing balance’ in paragraphs 14f and 14g should be interpreted as total reserves where the paragraph 28 charity is an operating charity.)
15. The accounts direction is reviewed annually. The 2016-17 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.
16. Any matters arising from this letter should be referred to the relevant HEFCE assurance consultant or assurance adviser. A searchable list of contacts can be found on our website at www.hefce.ac.uk/contact/search/.
Professor Madeleine Atkins