Investigation Report Bournville College July 2019 Contents Executive summary 3 Background 9 Objectives and scope of KPMG review of evidence 10 Findings from the review of evidence undertaken by KPMG 11 Procurement and payment arrangements for transactions with Smartphone Media and related companies 11 Expenditure on corporate hospitality and marketing 12 Arrangements for authorising and approval of the former Principal’s expenses 13 Arrangements for authorising and monitoring expenditure on the college’s overseas activity 14 Arrangements for approving pay increases and appointment of staff 16 Conclusions from the review of evidence by KPMG 18 Changes to the regulatory framework since 2015 20 Recommendations made by ESFA 22 2 Executive summary 1. Further education and sixth-form colleges are operated by statutory corporations which are responsible for the effective and efficient use of resources, the solvency of the college and the safeguarding of its assets. The Department for Education’s (DFE) regulatory framework1 administered by the Education and Skills Funding Agency (ESFA) underpins the statutory responsibilities of college corporations. The regulatory framework sets out expectations of governing bodies for oversight of regularity (i.e. what the college spends money on), propriety (i.e. the manner in which decisions are made), and value for money (i.e. the basis for making decisions). This report describes practices at Bournville College between 2011 and 2015 which clearly fell significantly short of these expectations in terms of the oversight and control of expenditure. Evidence suggests those practices included, but were not limited to, the appointment of relatives of senior managers to positions within the college without declarations in the college’s Register of Interests, overseas activity with no approved budget nor fully specified business case, and the procurement of large contracts - often without a formal tender process and occasionally with no evidence of goods or services actually being delivered. The report also highlights changes made to the regulatory framework since the issues were identified, and provides college governing bodies with a set of recommendations to support them in guarding against poor practice. 2. At the time of the events described in this report, Bournville College was a medium-sized further education college, serving around 15,000 learners in Birmingham. In late 2013, the college requested Exceptional Financial Support funding from the former Skills Funding Agency2 (SFA) as it was unable to meet its financial commitments. As a result, the college was subject to intervention by the SFA and the Further Education (FE) Commissioner. This intervention led to significant changes in the executive leadership and governance of the college, and a change of strategic direction for the college. However the college was unable to reverse its financial decline and following the Birmingham and Solihull FE Area Review the governing body agreed to dissolve the corporation in order to merge with South and City College Birmingham. The total amount of Exceptional Financial Support provided to Bournville College between December 2013 and the merger in August 2017 was £26.5 million, none of which was repaid to the government. 3. In May 2015, the FE Commissioner raised concerns with the Minister for Skills about potential misuse of public funds and potentially fraudulent activity by the former Principal, who had left the college in December 2014. The FE Commissioner’s concerns 1 The regulatory framework includes the DfE’s funding agreement with colleges, the college accounts direction and the post-16 audit code of practice. 2 The responsibilities of the Skills Funding Agency now sit with the Education and Skills Funding Agency. 3 were based on discussions with members of the college’s then Senior Management Team and Governing Body, and did not involve a detailed review of evidence. The Minister for Skills requested that these areas be followed up by way of a detailed investigation, in relation to which the SFA engaged KPMG LLP (KPMG) to review evidence covering the four academic years from August 2011 to July 2015. The objectives of the KPMG investigation were to establish the factual accuracy of the concerns raised, which were: that the former Principal had operated outside the college’s financial regulations and beyond his delegated authorities that if the former Principal did operate outside of the financial regulations, he operated fraudulently that other members of staff and governors were complicit in the arrangements. 4. The report that the SFA received in December 2016 from KPMG identified instances where: there was a failure of senior managers and governors over the four years for which evidence was reviewed to comply with the relevant version of the college’s Financial Regulations in relation to procurement processes and financial controls expenditure on key corporate hospitality and marketing events showed breaches of the college’s Financial Regulations and Anti-Bribery Policy, including failing to update the Register of Interests in a timely way and to declare potential conflicts of interest the college’s review process for the expenses incurred by the former Principal and other senior staff was non-compliant with its Financial Regulations, and there was little evidence of challenge to the former Principal by successive Chairs of Governors on individual items of expenditure there was limited evidence of any control over costs of overseas travel. Reports provided to the corporation were incomplete and excluded overseas travel expenses from the activity costs presented. There was little evidence that governors challenged the lack of information, or sought justification for time spent and college funds used, on introducing commercial organisations to overseas contacts without formal partnership arrangements in place. There was no entry on the Register of Interests for the former Principal or governors regarding their directorships in a joint company that was set up with another body, Trans Data Management, which is a breach of the Financial Regulations and the college’s Anti-Bribery Policy 4 relatives of senior managers were appointed without declarations in the Register of Interests. Pay increases for senior post holders and some senior managers were approved over and above those paid to all college staff during a period of decline in financial performance of the college overall, monitoring of expenditure by governors was at a high rather than a detailed level and there was use of exception reporting for retrospective approvals. This limited governors’ ability to disallow the expenditure or consider reasonableness and value for money prior to the services being procured. 5. While not part of the KPMG findings, it is worth noting that according to the college’s annual reports for three of the years in question the college’s external auditors provided an unmodified regularity audit opinion. It was the responsibility of the auditors to provide assurance to both the governing body and the SFA that the college’s expenditure and income had been used for the purposes intended by Parliament, and that the college’s financial transactions complied with relevant rules, including the college’s own financial regulations. The unmodified opinion means that the auditors agreed with the governing body’s own view that it was discharging satisfactorily its responsibility for the proper conduct of the college’s financial affairs, and as a result the SFA had no reason to question the financial procedures of the college. For the year ending July 2015, the college’s external auditors were aware of the KPMG review of evidence and therefore did not provide a regularity audit opinion. The college’s external auditors were RSM Tenon Audit Ltd for 2011/12, Baker Tilly Audit Ltd for 2012/13, Baker Tilly Audit UK LLP for 2013/14 and RSM UK Audit LLP (formerly Baker Tilly Audit UK LLP) for 2014/15. 6. On the question of whether the former Principal had operated fraudulently, the SFA referred the KPMG report to the West Midlands Police who decided not to pursue a criminal prosecution. 7. The KPMG findings in this report and the underpinning KPMG report of the review of evidence have been shared with the former Principal and a former Chair of Governors, neither of whom have provided any factual corrections to the reports. 8. The preparation of this report has taken a significant amount of time since the receipt of KPMG’s findings in December 2016 due to concerns about the potential impact of publication on actions that might be taken by other agencies. Following the decision by West Midlands Police not to pursue a criminal prosecution, the KPMG findings were shared with the Charity Commission for consideration of regulatory action. Initial discussions with the Charity Commission suggested that it would be preferable for the findings to remain confidential while under consideration. ESFA received confirmation in February 2019 that the Charity Commission would not be taking any action on the basis of the KPMG report. Subsequent due process has been undertaken to allow for factual accuracy checking and internal review. ESFA is now reviewing procedures for referrals to other agencies to ensure that findings from investigations can be made public as soon as 5 possible, without putting at risk any further action that might be taken against individuals or organisations. 9. At the time of the events described in this report, government policy was to encourage colleges to respond flexibly to local and national priorities for education and training. This was supported through relaxation of prescriptive requirements and the removal of government controls that had previously been in place, relying instead on governing bodies to discharge their statutory responsibilities. While the majority of governing bodies have done this well, in the light of the failings in the Bournville case and experience elsewhere DfE and ESFA have recognised that the regulatory framework can be improved to better support robust governance.