At our first meeting for 2025 of the Chairs of Audit Committees from Higher Education Institutions, Rowena Rowley, Head of Governance at the Office for Students (OfS), and Will Dent, Head of Financial Sustainability, shared their insights. The key points discussed during the session are as follows:
In the Higher Education sector, the OfS regulates a diverse range of providers, acknowledging that not all higher education institutions are traditional universities. This includes postgraduate institutions, specialist institutions, and more. The OfS adapts its approach to accommodate these various types of providers on a day-to-day basis.
The primary focus at present is the protection of public funding. The OfS has been working closely with the Department for Education and the Student Loans Company over the past 18 months on this issue and the ongoing emphasis remains on safeguarding funding. As financial statements are submitted, the OfS conducts funding assurance work. If the process runs smoothly, institutions may not be aware of this review. The OfS reviews all higher education financial statements to ensure that auditors provide a clean opinion on the use of public funding. This work is aligned with the National Audit Office (NAO) framework, with contextual flags raised in cases where there are concerns about the regularity or propriety of public funding usage.
The OfS monitors trends and themes related to compliance, particularly focusing on governance and internal controls. Reading the disclosures in the narrative section of financial statements can be very illuminating, offering insights into how institutions are functioning and whether any concerns may arise.
Management, governance, and oversight of risk is a key priority for the OfS. Institutions are regulated against initial and ongoing conditions of registration, which cover a range of areas that may not always be top of mind for Audit Committees. The OfS takes a holistic view when regulating providers and closely examines emerging compliance concerns. One of the main questions considered is whether the institution’s management and governance structures are adequately identifying and mitigating risks. The sector is facing both external and internal challenges, which are prompting many institutions to revise their strategic direction and explore diversification. These strategic decisions often bring increased risks, so the OfS is particularly focused on higher-risk business models.
The external auditor’s management letter, which is part of the annual financial return, is an important component in assessing how audit risk is managed at each institution. The OfS reviews all such letters to gain useful context, although they may not always highlight specific issues of concern.
Recent Trends in Financial Sustainability
The OfS financial sustainability team assesses the annual financial return data from institutions, identifying financial risks. If any institution is identified as facing elevated financial risk, further engagement is initiated to understand the actions being taken to mitigate these risks.
A significant theme has been the forecasting of student numbers over the next five years. The 2023 mid-year recruitment data showed unprecedented downward variations in recruitment for January 2024, largely due to changes in the government’s migration policy concerning international postgraduate students. This shift, along with other factors, has had an impact on international student recruitment, which is expected to continue influencing the 2024/25 cycle. The effects of this have also extended to domestic recruitment, with some higher-tariff institutions responding by increasing their focus on home students. This situation has resulted in greater uncertainty and less predictability in home student recruitment.
The financial implications of these changes are significant. Institutions are being forced to implement strategies to address recruitment challenges, either by stemming the decline in recruitment or by radically adjusting their business models to ensure long-term sustainability. Recent financial performance data has shown significant downward variations, with deficits and negative operating cash flows becoming more common. Financial performance is expected to dip in the short term, but gradual recovery is anticipated over time.
As these challenges emerge, it is increasingly important for governing bodies to engage in frank discussions about whether they have the right leadership in place to manage these changes. Ensuring that governance structures are aligned with evolving financial conditions is crucial.
Capital investment, particularly for estate maintenance, is another area of concern. The capital backlog is growing, and the cost of capital is rising. Institutions must focus on efficient management of their cost base, identifying areas of their operations that can be streamlined or delivered differently to maintain financial sustainability.
While innovation is key to managing costs, it remains challenging to implement radical changes that may not resonate with students, particularly in a highly competitive market. However, collaboration within the sector to share cost management innovations is essential.
Use of Data and Extended Audit Cycles
The OfS uses a wide range of data, including annual financial returns, audit management letters, recruitment data, and visa information, to develop a comprehensive picture of each institution. The data collected is crucial for assessing financial health and risk levels.
A new trend is the extended audit cycle, which is predominantly due to increased financial risks and concerns over going concern. Institutions and auditors are engaging in more extended discussions, particularly around cash flow and long-term viability. The going concern period is now being considered for a longer horizon due to recruitment cycles that set the income for the next academic year.
Another emerging trend is the inclusion of material uncertainties in respect of going concern. This is a relatively new development and reflects the increased financial challenges facing the sector. While banks remain supportive of the sector, there is a diminished appetite to lend to institutions with higher financial risks. This has created a less universally supportive environment for the sector.
Changing Approach of the OfS
The OfS was originally established in a different risk environment and operated primarily as a data-led regulator. However, with the evolving financial landscape, the OfS has shifted its approach to engage more proactively with institutions. There is now a greater emphasis on real-time financial data, with a short survey expected to gather updated financial information based on recruitment data and other relevant factors. This will enable the OfS to align more closely with real-time conditions.
Early Intervention and Exit Scenarios
The OfS is preparing for scenarios where institutions face financial collapse. In such cases, the protection of students’ interests is paramount. The OfS has observed instances of students transferring to other institutions, as well as some proactive mergers within the sector. Early intervention is critical to preventing financial instability and ensuring that students are protected.
The Department for Education (DfE) also has a role in supporting the sector and is aware of the increasing challenges. Together with the OfS, the DfE has a responsibility to ensure the financial stability of institutions and the protection of students’ interests.
Audit and Risk Committees are encouraged to consider the impact of financial challenges on the student experience. While there are many external factors beyond the control of institutions, it is essential that governance structures address the risks associated with changes in strategy, ensuring that the impact on students is fully considered.
Our next Higher Education Chair of Audit Committee roundtable will be taking place at 9am on Thursday 15 May 2025 where we will be joined by Stephanie Harris, Director of Strategy at Universities UK. Contact Louise Hughes: lhughes@hwfisher.co.uk to reserve your place.
We’d love to hear from you. To book an appointment or to find out more about our services:
