The Role and Effectiveness of Audit Committees in UK Higher Education Institutions

The aim of the project was to investigate corporate governance practices in UK higher education institutions (HEIs). Specifically, the project sought to examine the role and effectiveness of the audit committee in supporting what was initially conceptualised as ‘financial leadership’ in HEIs. What makes a board, and its various committees, an effective mechanism is a key and recurring question, which has been raised in academic, practitioner and policymaking circles and is relevant to companies, public bodies, charities and universities alike. The case of the audit committee is often highlighted in practice and in the literature, since it is a central plank of any corporate governance structure, normally tasked with overseeing the financial, control, auditing and risk management aspects of the organisation. In the light of the rapidly changing and uncertain financial environment faced by UK HEIs, the role of the audit committee is critical in monitoring, advising and shaping the HEI’s direction, and its work and structure have been the subject of detailed guidance by the Committee of University Chairs (CUC), supplemented by developmental resources from the Leadership Foundation for Higher Education and accountancy firms. However, what has been missing so far is a comprehensive cross-sectional analysis of the audit committee’s actual structure and characteristics in UK HEIs and the impact this has on organisational outcomes, and a deeper understanding of the role and activities of the audit committee from the field. In terms of the practical direction adopted during the research and how the results are presented in the final report, this has cascaded into three sub-objectives that we have fully achieved; ie, to: (a) investigate the characteristics of the audit committee in UK HEIs (b) investigate HEIs’ level of public accountability and the likely impact of the audit committee on accountability and other organisational outcomes (c) explore the role and effectiveness of the audit committee in detail. Our research was in two stages. In the first, we conducted a large-scale exploration of corporate governance practice in 130 UK HEIs, with a focus on the audit committee, as well as the level of public accountability and transparency disclosures in their annual reports and other public sources. In the second stage, we carried out a more in-depth analysis by interviewing 23 important actors from four key groups, namely chairs and members of audit committees, finance directors and internal auditors in six HEIs selected as case studies, including observations of three audit committee meetings. We found the following: (i) Whilst all 130 UK HEIs had an audit committee, 82% of these committees can be described as well-composed in terms of having the minimum number of independent or lay governing board members (three). The committee size for most HEIs ranged between four and six (minimum of two and maximum of twelve) and included co-opted members. The insights from interviews and observations highlighted a significant and increasing workload faced by audit committee members. (ii) 94% of audit committees have at least one financially experienced member, indicating that most have complied with the minimum requirement. Evidence from our case studies suggests that interviewees are more concerned about the insufficient mix of competence and background to deal with the oversight of different processes and systems in the HEI. Interviews with finance directors generally indicated a view that they are not sufficiently probed in terms of accounting, financial and similar technical issues although it is clear that the broader remit of the audit committee (notably driven by the ‘risk agenda’) has led to more investigations into the operational and strategic activities of the HEI. (iii) HEIs’ level of accountability and transparency, measured in terms of a public accountability and transparency index (PATI), is generally low, with an average of 44.5%. In particular, HEI annual reports provide little detailed data on teaching performance (output and process) and governance. Similarly, HEIs’ disclosure of governance practices, including those relating to the audit committee in annual reports (as a major and official medium of organisational communication), is very low. (iv) Understanding of the ‘monitoring’ and ‘oversight’ role of the audit committee varied, with some interviewees resolute in that the committee focuses only on ensuring that the processes are in place (ie a focus on whether there is a clear process for reaching decisions, and whether such processes have been followed appropriately) and as such, the committee should not be concerned with the outcomes of the process or achievements of the decision (ie, whether the decision reached was appropriate or not). Other committee members, however, adopt a more mixed approach to the monitoring of both process and outcome. This finding can be associated with a very unique setting where most governing boards would also comprise a finance committee, tasked with reviewing financial performance and outcomes. However, we would argue a more balanced approach (ie, one that considers the appropriateness of both processes and outcomes) to audit committee work is essential to its effectiveness. (v) ‘Risk management’ (and its oversight) is now an established language and methodology within the audit committee and has enabled a more holistic examination of controls, processes and systems throughout institutions. However, the degree of sophistication in applying risk management varied considerably between the case study institutions. (vi) The extent to which the scope of the audit committee influences individual institutions varies; some are more concerned about support functions (such as IT, procurement and student accommodation) and less about core academic activity (eg, provision of courses, portfolio of offerings, efficiency in the use of academic staff time and delivery of courses). (vii) Organisational understanding of the audit committee’s effectiveness (and how to assess it) remains either informal and symbolic or wedded to the minimum self-assessment system outlined in the CUC guidance. Informed by the above, we offer 10 recommendations for consideration by university governing boards, leaders in HEIs and the relevant regulators and policymakers: Recommendation 1: The membership of the audit committee threshold to be increased to at least five members of the governing board (review of Principle No. 3, CUC, 2008), with a view to enabling the formal inclusion of a broader mix of skills and competences. Recommendation 2: The membership of the audit committee to include, as a requirement, a representative from the academic community of sufficient standing (ie, professor; head of school, faculty or academic unit) to provide skills that are more directly applicable to the oversight of teaching, academic leadership and research. Recommendation 3: The audit committee to be provided with sufficient management information and other performance reports (including regular updates on the outcomes of value-for-money initiatives) to enable it to appreciate the context in which it is overseeing processes, systems, controls and the risk register. Recommendation 4: Given the relative importance and power of the finance committee in many institutions and that it somewhat seeks to provide a complementary oversight role alongside the audit committee, the CUC to consider developing sector-level guidance on the composition of the finance committee (for HEIs having such a committee), in a similar way to other governance structures. Recommendation 5: Notwithstanding recommendation #4, the approval of audited financial statements to be processed as a joint session of the audit and finance committees to ensure the communication of common information and views between members of both, in addition to management and external and internal auditors. Recommendation 6: To enable clear accountability and to set the ‘tone at the top’, the vice chancellor, principal, director or head of institution or his/her immediate deputy to attend audit committee meetings as a matter of course, alongside the finance director and other strategiclevel managers (eg, risk management). Recommendation 7: HEIs to consider an effectiveness review process for the audit committee that is beyond the current self-assessment system. Such evaluations of the effectiveness and performance of the committee should be disclosed publicly as a matter of good governance and best practice. Recommendation 8: The governance-related activities (inclusive of the audit committee’s activities in relation to controls, risk and value for money) to be publicly disclosed as part of the annual report using private- or public-sector disclosure guidance as a baseline. HEIs’ commitment to public accountability and transparency to be enhanced through increased disclosures relating to public accountability and transparency, such as teaching services, research services, community engagement and financial information in the annual report. Recommendation 9: The CUC, in collaboration with governance-related institutions (such as the Leadership Foundation), to start a consultation on the remuneration of governing board members in a bid to attract more specialist members, such as those required within the audit committee, and to ensure greater accountability and input in terms of their contribution and effectiveness. Recommendation 10: The CUC, in collaboration with governance-related institutions (such as the Leadership Foundation) and auditing firms, to commission an in-depth study of risk management methodologies and practices as implemented in the higher education sector, with a view to updating the existing literature and knowledge of practice (Summers and Boothroyd, 2009) and identify clearer instances of best practice