What are universities hiding about Vice Chancellor pay?

“Universities understand that today’s students are keen to know more about university finances and in particular about how their fee income is spent,” or so says the foreword to Universities UK’s guidance on financial transparency.

Here we take a look at how that assertion compares with what universities do and don’t disclose in their accounts that may well be of interest. The Office for Students (OfS) has released a fun little report on this very issue – the quietly uploaded “Compliance with the 2017-18 accounts direction: Observations, compliance and areas for improvement”, and we’ve pulled out our favourite bits.

OfS’ accounts direction basically sets out things “that are important for transparency” that must appear in annual financial statements. The “compliance” document represents an in-depth review of the audited accounts of about a quarter of the 133 mainstream higher education providers in England that had to follow the direction for financial year ending 31 July 2018. It’s an example of what will become their more general sampling approach to regulation in the future.

Tell us the trough

First there’s an issue with publication. OfS required providers to sign their accounts, and then upload them on their website within two weeks (both within four months of the end of the financial year to which they relate). They were all signed, but in several cases publication “was later than required”. Naughty naughty.

Perhaps of more interest to students (or, more likely, journalists) is VC pay. Here there has been all sorts of naughtiness – presenting the head of provider’s salary as the amount paid rather than on an FTE basis, disclosing the nature of some benefits but not their estimated monetary value (things like rent-free accommodation), disclosing the value of taxable or non-taxable benefits but not stating what these benefits are, and hiding the value of benefits in the “narrative note” to the financial statements but not listing them with remuneration – rendering that “incomplete, and the total understated”.

OfS is also not happy with the justification for high pay. As a reminder, this has to include reference to the “context in which the provider operates”, be linked to the “value and performance” delivered by the head of the provider, and contain an explanation of the process adopted for judging their performance. But in a number of cases it could only find technical information about the process, with the justification missing. Very naughty.

I feel weak

When they did find a justification statement, most of these statements were “relatively weak”, containing “little of the required information” that would help students and taxpayers to understand the context of the provider, how the remuneration decision reflected the individual’s value and performance, or how the performance was judged by the governing body.

Singled out for particular ire is the approach of providing little information “beyond stating that remuneration is below benchmark” without explaining the benchmark used, why this was appropriate, or whether the head of provider was in fact paid appropriately “given their responsibilities, performance and value to the provider”. Where a provider finds that it is unable to set out a clear justification for the pay of the head of provider, OfS expects its governing body “to reflect on why this might be the case” and whether the remuneration of the heads(s) of the provider is a “justifiable use of charity assets and public funds”. I love the idea of finding a set of accounts that says “God knows why we’ve paid Fred £250k this year, but we’ll have a think next year”, but that’s OfS’ advice.

They’ve also caught some not disclosing severance payments for staff or the number of employees they affect – something that explains some of the data issues that David Kerrnohan identified when OfS published on pay earlier in the year.

Control

Given that governing bodies are responsible for effectively using students and taxpayers’ funding, the other big theme in the direction is that providers set out arrangements for the management of risk and the prevention and detection of corruption, fraud, bribery and other irregularities.

But in the review, none of the providers had disclosed significant internal control weaknesses (or explicitly stated that there were no significant control weaknesses that should be disclosed), several providers failed to cover all types of risk (business, operational, compliance and financial), some omitted a description of how they identify and manage risk, and others didn’t not explain whether (and how) risk assessment and internal control is embedded in their ongoing operations.

Some also failed to include a statement on how the provider reports to the governing body about internal control and risk.

Time to take action

The accounts direction just talks about the text that finance directors have to put in their financial statements, and it could be that, internally, VC pay is very well justified and that governing bodies are very active in managing risk – but they just haven’t written it all up.

On the other hand, these things could be missing because they really were missing, if you see what I mean. The obligation to comply with the accounts direction “constitutes a legally binding requirement” and where this requirement is not met, this is likely to constitute a “breach of a condition of registration”, but OfS isn’t going to take action on these breaches yet.

This year it is dealing with these areas of non-compliance by publishing these “themes and feedback” on compliance issues rather than using enforcement powers. But this non-compliance amnesty won’t last. Where it considers that a provider’s practice is non-compliant in future, OfS is likely to take action “which can include the ability to impose a monetary penalty”. And if actual practice in 2018-19 hasn’t been good enough to support the right slice of text, it might be too late to fix it for this year’s accounts. We’ll know more when another year of accounts start to appear in November.