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Financial Memorandum between HEFCE and institutions

By Joann Tucker,2014-04-16 21:12
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Financial Memorandum between HEFCE and institutions

June 2008/19 The model Financial Memorandum,

    between HEFCE and the institutions we Core funding/operations

    fund, sets out the terms and conditions for Report payment of HEFCE grants. The

    Effective 1 August 2008 memorandum should be read in

    conjunction with Part 2, the schedule,

    which gives conditions specific to the

    institution, the funds available to the

    institution, and the educational provision

    the institution has agreed in return for

    those funds. This document replaces

    HEFCE 2006/24 issued in July 2006.

    Model Financial Memorandum

    between HEFCE and institutions

HEFCE 2008

Contents

    Financial Memorandum between HEFCE and institutions ........................................... 2 Purpose of this document ................................................................................................ 2 Our responsibilities to institutions .................................................................................... 2 Institutions’ responsibilities to HEFCE ............................................................................. 3 Financial management and sustainability ........................................................................ 5 Estate management and exchequer interests ................................................................. 6 Accountability and risk assessment ................................................................................. 6 Revisions to the memorandum ........................................................................................ 7 Annex A: Mandatory requirements of the Financial Memorandum and

    Accountability and Audit Code of Practice..................................................................... 8 Annex B: Accountability and Audit Code of Practice.................................................. 11 Executive summary ........................................................................................................ 11 Introduction..................................................................................................................... 12 Corporate governance ................................................................................................... 13 Higher education audit framework ................................................................................. 13 General principles for internal and external auditors ..................................................... 16 Audit and risk assessment of HEIs by the HEFCE assurance service ......................... 17 Audit committees in HEIs ............................................................................................... 19 Internal audit arrangements in HEIs .............................................................................. 21 External audit arrangements in HEIs ............................................................................. 25 Annex C: Allocating and paying funds ......................................................................... 30 Annex D: Institutional engagement and support strategy .......................................... 32 Introduction..................................................................................................................... 32 Normal contact ............................................................................................................... 32 Focused dialogue ........................................................................................................... 32 Support strategy ............................................................................................................. 33 Annex E: Annual assurance return from institutions .................................................. 36 Annex F: Consent for financial commitments .............................................................. 37 Introduction..................................................................................................................... 37 Definitions ....................................................................................................................... 37 Our response.................................................................................................................. 38 Information required ....................................................................................................... 38 Annex G: Exchequer interests ....................................................................................... 41 Introduction..................................................................................................................... 41 Requirements ................................................................................................................. 41 Circumstances in which the exchequer interest becomes repayable ........................... 42 Annex H: Definitions and abbreviations ....................................................................... 43

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Financial Memorandum between HEFCE and institutions

In this memorandum the definitions listed at Annex H apply.

Purpose of this document

    1. This Financial Memorandum sets out the formal relationship between HEFCE and the governing bodies of the institutions it funds. It reflects our responsibility to provide annual assurances to Parliament that:

    ; our funds are being used for the purposes for which they were given

    ; risk management, control and governance in the sector are effective

    ; value for money is being achieved.

    2. The memorandum is in two parts. Part 1 (this document) sets out the terms and conditions which apply in common to all institutions funded by HEFCE. Part 2 (issued each year) gives conditions specific to the institution, a schedule of funds available in the academic year and the educational provision the institution has agreed to make in return for those funds. References to the memorandum embrace both Part 1 and Part 2.

    3. Institutions are bound by the requirements of their charter and statutes (where appropriate) and by rules relating to their charitable status. This document does not supersede those requirements; rather, it provides evidence that institutions are complying with them.

    4. This memorandum takes effect from 1 August 2008, as does the Accountability and Audit Code of Practice (Annex B).

Our responsibilities to institutions

    5. We will work with institutions and the higher education sector to the high standards of openness, integrity and consistency expected of public sector bodies. We recognise that institutions are autonomous bodies and will act reasonably. We will not ask for information that we already have, and as far as possible we will rely on data and information that institutions have produced to meet their own needs. We will try to make regulation efficient and ensure that its benefits outweigh the costs to institutions, ourselves and other parties.

    6. Our aim is to be open and transparent with institutions and other stakeholders. We recognise that this may sometimes conflict with the desire to protect commercial confidentiality. In complying with the Freedom of Information Act and similar legislation we will try to make it clear to institutions what information we regard as confidential, and we will judge each case on its merits.

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    7. Our grants to institutions are to fund activities defined by the Further and Higher Education Act 1992 (‘the 1992 Act’). For higher education institutions (HEIs) these are:

    ; providing education and undertaking research

    ; providing facilities and undertaking activities that the institution’s governing body

    thinks are necessary or desirable for providing education or doing research.

For further education colleges (FECs), we fund the provision of ‘prescribed’ courses of

    higher education.

    8. Our funding is subject to certain conditions, as set out in the 1992 Act. The Act allows us to add certain conditions to our funding. We will consult the sector on any changes to those conditions.

    9. These conditions of funding do not apply to any funds that institutions receive from other sources, although the principles will be reflected in conditions of grant associated with other public sector income to institutions. We want to encourage them to develop other sources of income that are consistent with their overall mission and objectives.

10. We will review an institution’s annual accountability returns to us and give to the

    designated officer and governing body a confidential risk assessment. When we assess an institution to be ‘at higher risk’, we will engage with it in line with our institutional engagement and support strategy (see Annex D). One of the annual accountability returns to be submitted is the annual assurance return (see Annex E).

Institutions’ responsibilities to HEFCE

    11. HEFCE is the major public sector funder of HEIs as a whole and has lead public accountability for them. As a result, institutions need to provide certain information about their viability and the way they operate. HEFCE is also being appointed as the principal regulator of the sector under the Charities Act, though this should not involve a significant additional burden on institutions.

    12. Institutions are accountable to all their stakeholders, not just HEFCE, and this will be easier if they operate in an open and transparent way. An institution will need to plan and deliver its activities effectively, in line with its mission and objectives, and meet its various legal requirements, particularly those to ensure fair and equal treatment of its staff and students.

    13. The governing body of an institution is collectively responsible for overseeing its activities, determining its future direction and fostering an environment in which its mission is achieved. Acting in accordance with the institution’s own statutes and constitution (where appropriate), the governing body should ensure that the institution:

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    ; has a robust and comprehensive system of risk management, control and corporate

    governance

    ; has regular and adequate information to monitor performance and track the use of

    public funds

    ; plans and manages its activities to remain sustainable and financially viable ; informs us of any change in its circumstances which, in the judgement of the

    designated officer, is a material adverse change

    ; uses public funds for proper purposes and strives to achieve good value for money

    from public funds

    ; complies with the mandatory requirements relating to audit, set out in our audit code

    and our annual accounts direction

    ; sends us:

     the annual accountability returns which constitute the ‘single conversation’ (see

    paragraph 28)

     other information we may reasonably request to understand the institution’s risk

    status

     any data requested by the Higher Education Statistics Agency (HESA) ; has effective arrangements for the management and quality assurance of data

    submitted to HESA, HEFCE and other funding bodies (we reserve the right to use our

    own estimates of data where we have reason to believe institutional data are not fit

    for purpose)

    ; considers our assessment of its risk status and takes action to manage or mitigate

    the risks we identify.

14. The governing body will appoint the head of institution as the ‘designated officer’,

    who will advise the governing body (and HEFCE, if necessary) if the institution fails to comply with this memorandum. The designated officer and/or chair of the governing body

    may be required to appear before the Public Accounts Committee alongside the chief executive of HEFCE, as our accounting officer, on matters relating to grants to the institution.

15. Institutions shall subscribe to HESA and the Quality Assurance Agency for Higher 1Education (QAA), and ensure that their use of JANET and SuperJANET networks

    conform to acceptable practice and current legislation.

    16. We expect institutions to consider how their actions affect our policy objectives for the sector, as set out in our strategic plan. When they plan a major change in strategy or academic provision, or consider merging with another body, they should discuss this with us at an early stage.

1 See Annex H for definitions.

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    17. Institutions may only use Council funds for activities eligible for funding under the 1992 Act and other relevant legislation. This condition applies where the HEI passes on part of its HEFCE grant to another legally distinct entity a ‘connected institution’ – for

    the provision of facilities or learning and teaching or for research to be undertaken. In such cases, as set down in Section 27 of the Teaching and Higher Education Act 1998 (‘the 1998 Act’), the institution must obtain the Council’s consent before passing HEFCE funds to the connected institution.

Financial management and sustainability

    18. Institutions should have a financial strategy that reflects their overall strategic plan, sets appropriate targets and performance indicators and shows how resources are to be used. To remain sustainable and financially viable they should also assess, take and manage risks in a balanced way that does not overly constrain freedom of action in the future.

19. Institutions must:

    ; stay solvent

    ; not incur deficits, unless these are covered by discretionary reserves. Any deficits not

    covered by these reserves must be recovered within three years or within a period

    agreed with us. For this purpose, any pension scheme deficits included on an

    institution’s balance sheet following implementation of FRS17 should be excluded

    from the calculation of reserves. However, institutions should still work towards

    improving any pension scheme deficits.

    20. We normally expect an institution to increase its reserves broadly in line with income. A series of deficits, even if covered by discretionary reserves, might be a cause of concern, as could low levels of liquidity or increased borrowing. In such cases we would expect to discuss financial performance and strategy with the institution.

    21. We expect an institution to consider the consequences of new financial commitments and ensure they are consistent with its strategic plan and financial strategy and represent good value for money. We are to review our requirements as set out in paragraph 22 and Annex F during 2008-09 and this Financial Memorandum will be revised in 2009 as appropriate.

    22. An institution must get written consent from us before it agrees to any new financial commitments as follows:

    a. Long-term commitments where the annualised servicing cost of its total financial

    commitments would increase to above 4 per cent of total income.

    b. Short-term financial commitments where negative net cash exceeds 5 per cent of

    total income for more than 35 consecutive days.

    Annex F sets out the information we need to assess both types of request, and explains the methods of calculating the annualised servicing cost and negative net cash.

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    23. The thresholds mentioned in paragraph 22 are not limits and should not constrain an institution from increasing its financial commitments where this is appropriate. An institution should determine the level of borrowing that is both affordable and consistent with its financial strategy. We ask the institution to demonstrate this in the case presented to us, show that the proposal represents good value and confirm the approval of its governing body. In responding to requests for consent we aim to be helpful and pragmatic, taking into account the circumstances of each proposal.

    24. As part of ensuring its long-term viability, an institution should know the full cost of its activities and use this information in making decisions. If it does not seek to recover the full cost, this should be the result of a clear policy set by the governing body and included in the financial strategy, and should not put the institution in financial difficulty. We expect our funds not to subsidise non-public activities.

Estate management and exchequer interests

    25. Institutions should manage their estate in line with an estates strategy. The strategy should be written with reference to guidance available to the sector, including that from HEFCE. Institutions should review their current and expected use of land and buildings, and consider rationalising and disposing of assets no longer needed. Former voluntary colleges and other institutions holding land and buildings not covered by exempt charitable status shall also take into account the requirements of the Charity Commissioners.

    26. For exchequer interests, the institution, having entered into an agreement with HEFCE effective on 1 August 2006, shall follow the conditions set at Annex G. If an institution has not signed such an agreement, it is bound by the terms and conditions set out in the earlier model Financial Memorandum (HEFCE 2003/54).

Accountability and risk assessment

    27. We expect institutions to have governance and management processes that can readily demonstrate to their public sector funders (including HEFCE) proper control over, and accountability for, the use of public funds. The better these processes are, the easier it will be for institutions to show that they are making proper use of public money.

    28. As far as possible the accountability process between HEFCE and institutions will be concentrated into an exchange of documents and dialogue during a specific period each year this is known as the single conversation. We will confirm the specific

    content of this exchange each year and consult the sector on any major changes to the process. Our aim is to minimise our demands on institutions and as far as possible to rely on data and information that they have produced to meet their own needs.

    29. Institutions should send us their accountability information on the specified dates in December of each year. We will review this and give each institution a confidential, formal assessment of its risk status. For those we consider to be ‘not at higher risk’ – in

    our experience to date, the vast majority there will be no need for further information or

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    discussion of accountability until the next year’s return. Sometimes we will ask for more information to clarify uncertainties.

30. When we assess an institution as ‘at higher risk’ we must respond appropriately, to

    protect the public interest. Our institutional engagement and support strategy (see Annex D) describes the range of ways in which we might respond and help institutions resolve difficulties and manage risks. We will always discuss our concerns with the institution, and take its views and actions into account, before we formally make an ‘at higher risk’ assessment. We will also try to reach agreement on what needs to be done. When we consider the institution to be no longer at higher risk, we will write to its governing body to confirm this.

    31. Beyond the exchange of accountability information each year, we welcome the opportunity for regular and informal discussions with an institution about its plans and developments. We believe this will help us to work together and reduce the risk of misunderstanding.

Revisions to the memorandum

    32. We will revise this document only after consulting the sector or its representative bodies.

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Annex A: Mandatory requirements of the Financial

    Memorandum and Accountability and Audit Code of Practice

    1. The following are mandatory requirements of the Financial Memorandum and the Accountability and Audit Code of Practice (the Code). We will assess compliance with

    these.

    2. The governing body must ensure that the institution meets its responsibilities as set out in paragraphs 11 to 29 of the Financial Memorandum.

    3. The institution must obtain written consent for financial commitments, as specified in Annex F to the Financial Memorandum.

    4. The governing body of each higher education institution (HEI) must take reasonable steps to ensure that there are sound arrangements for risk management, control and governance, and for economy, efficiency and effectiveness (value for money), within the HEI.

    5. Each HEI must have an effective audit committee which produces an annual report for the governing body and the designated officer. The audit committee annual report must relate to the financial year and include any significant issues up to the date of preparing the report which affect the opinion. The audit committee annual report must include the audit committee’s opinion on the adequacy and effectiveness of:

    ; the HEI’s risk management, control and governance arrangements

    ; arrangements for promoting economy, efficiency and effectiveness

    ; the arrangements for the management and quality assurance of data submitted to

    the Higher Education Statistics Agency (HESA), HEFCE and other funding bodies.

    6. Members of the audit committee must not have executive authority. Members should not also be members of a finance committee, unless the institution’s governing body has made a clear decision to allow one audit committee member to sit on both (no more than one member may sit on both and he or she should not be the chair).

    7. The audit committee of each HEI, advised where appropriate by its internal audit service, must satisfy itself that satisfactory arrangements are in place to promote economy, efficiency and effectiveness.

    8. Each HEI must have an effective internal audit function, which reports regularly to the audit committee and at least annually to the governing body and the designated officer. The internal audit annual report must relate to the financial year, and include any significant issues up to the date of preparing the report which affect the opinion.

    9. The work of the internal audit service must cover the whole of the risk management, control and governance arrangements of the HEI.

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10. The head of the internal audit service must have direct access to the HEI’s

    designated officer, the chair of the audit committee and, if necessary, the chair of the governing body. Internal as well as external auditors must also have unrestricted access to information including all records, assets, personnel and premises and be

    authorised to obtain whatever information and explanations the head of the internal audit service or the external auditor considers necessary.

    11. Internal and external audit services must not be provided by the same firm or provider.

    12. Fees paid to external auditors for other services must be disclosed separately in a note in the financial statements.

    13. Subject to legislative constraints, the HEFCE assurance service must have unrestricted access to information including all records, assets, personnel and

    premises and can require anyone to give any explanation which it considers necessary to fulfil its responsibilities. This includes access to any work of the internal and external auditors, or correspondence between internal and external auditors. For access to external audit work, the HEFCE assurance service will exchange letters (where necessary) with both parties to deal with confidentiality and the terms under which access is given.

14. HEIs must not agree to any restriction in external auditors’ liability in respect of the

    external audit of their annual financial statements, except as specified at Annex B, paragraph 100.

    15. The following information must be provided, according to a timetable which will be notified each year:

    ; a signed and approved set of financial statements

    ; a copy of the audit committee’s annual report

    ; a copy of the internal auditors’ annual report

    ; the completed annual assurance return (Annex E of the Financial Memorandum) ; a copy of the external auditor’s management letter and any management response.

16. The HEI’s designated officer must report any material adverse change – such as a

    significant and immediate threat to the HEI’s financial position, significant fraud or major accounting breakdown without delay to all of the following:

    ; the chair of the HEI’s audit committee

    ; the chair of the HEI’s governing body

    ; the HEI’s head of internal audit

    ; the external auditor

    ; the HEFCE chief executive.

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