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Sixth Report of the Board of Scrutiny: Notice

12 November 2001

The Council have considered the recommendations contained in the Sixth Report of the Board of Scrutiny (Reporter, 2000-01, p. 881) and the remarks made at the Discussion of the Report on 10 July (Reporter, 2000-01, p. 968). The Council have consulted the General Board and sought advice from the Finance Committee. In the light of that further information the Council comment on the Board's specific recommendations in their Report as follows:

Recommendations

I.  The Council should organize open debate within the University about what its policy should be about the rate of future growth and the implications of that policy for the governance of the University.

In paragraph 4 of their Report, the Board of Scrutiny referred to the perception that the University finds great difficulty in reallocating resources from established uses to new uses and puts a high priority on growth as an easier way to fund new resources than reallocation. There has been significant growth, particularly in the University estate; this has been driven by Funding Council initiatives for new build and refurbishment to compensate for the serious level of underfunding in this area in recent years, and through the success of fund-raising for projects on the University's priority list. The Resource Management Committee, which was established from 1 January 2001, takes a University-wide view of resource allocation. This has resulted in a more detailed scrutiny of proposals which must now be supported by detailed management information, since the Committee are very aware both of the implications of uncontrolled growth and the need to reallocate University resources within present limits. The Committee recognize the rapid development of the role of the Councils of the Schools and depend substantially on the considered advice of the Chairmen of the Schools, and of the two Sub-Committees which represent all other institutions, when assessing proposals. The development of a Resource Allocation Model (RAM), as part of an integrated planning and budgetary process, is an important element in supporting the central bodies, and through them the Schools, in ensuring that the University's resources are used to best effect and that the right balance is struck between growth and providing adequately for the support of existing activities.

II.  If the concerns expressed in the Notice on the Review of the Mission Statement about minority subjects are still current, there should be an open discussion about the future of small Departments, especially those outside the physical sciences, before the University attempts to move to produce the new resource allocation model. The discussion should include the question of whether there is any policy of allowing some small Departments to wither on the vine, with consequent constant increases in workloads for the remaining staff, and the consequences of such a recommendation. If the concerns in the Notice are not current, it should be withdrawn.

This recommendation highlights the general problem of how strategic issues are dealt with across a whole area of provision, in particular for minority subjects, but which the University has dealt with successfully in the past through, for example, consultation and discussion with other universities. At present there is no particularly pressing 'concern' about small institutions and therefore, while the future of small Faculties and Departments is a legitimate issue, an open discussion of the issue is not currently the most appropriate strategy for dealing with it. The early implementation of a RAM would assist, rather than hinder, a proper understanding of the costs involved, which might then be a matter for further discussion.

A revised Mission Statement has been put forward to the University for approval (see the Council's Notice, p. 226, and Grace 6, p. 255).

III.  The University should consider new methods, for example career change guarantees, to attract people into academic careers in an era in which there is a reasonable belief that academic pay and conditions will deteriorate markedly in the medium to long term.

and

IV.  The Council should facilitate open discussion about growing inequalities in pay and about the implications of moving to reliance on buying in outside talent.

The Personnel Committee, on behalf of the Council and the General Board, are devoting considerable thought to these issues. The Council and the General Board accept that these are pressing but difficult matters and continue to give them careful consideration. In their Notice of 29 October 2001 (Reporter, p. 139) the Council and the General Board invited comments on a range of such issues and on the content of the proposed Human Resource Strategy to be submitted to the HEFCE by 1 June 2002. The current strategy is available at http://www.admin.cam.ac.uk/offices/personnel/policy/.

V.  The University should develop performance indicators which measure the success of the institution for its members. Consideration should be given to developing indicators which describe the institution from the perspective of the median member of the Regent House.

The Council are informed that the Finance Committee receives a paper each year giving some Financial Management Statistics for the HE sector. In November 2000 the Committee discussed statistics relating to research grant overheads recovery. Other performance indicators relate to matters such as access, undergraduate and graduate completion rates, and numbers of mature and disabled students. These are generally referred to the Council and the General Board or their committees.

The Council will consider the development of internal indicators and propose that discussions be held with the Board of Scrutiny on how this may be achieved.

VI.  In considering the report of the Committee on Governance, the Council should commission research on successful democratically-based organizations in the private sector to inform its deliberations.

The Council have forwarded the Board's suggestion to the Committee on Governance. The Council hope to be able to report to the University on governance matters during the current academical year.

VII.  The Council should now move swiftly to bring the University's accounts into line with the SORP.

This recommendation related specifically to the treatment of income from the University's Amalgamated Fund. The qualitative characteristics of financial information that make it useful are its relevance, reliability, comparability, understandability and, above all, its materiality. The University operates an Amalgamated Fund as authorized under Statute F, III, 6 and shows as income the amount declared as dividend on the units held in that Fund. Where units are held by trust funds the SORP requires the University to bring in only such income as has been spent in the year. In the case of other units the full amount of the dividend is shown. What is not shown is the income received by the Fund but not distributed as dividend. That amount is accumulated within the Fund as an income reserve and is used by the Investment Sub-committee to smooth the distributions from year to year. The amount of such income reserve is included in the capital value of the units and is therefore included in the Balance Sheet and in Appendix C to the Accounts.

The Council have been advised that the Finance Committee believe that the University's Accounts provide a true and fair view of the financial position:

the annual adjustment that would need to be made to bring all income into account is not material, given the low percentage (20%) of the University's Amalgamated Fund income which relates to the Chest;
to show the actual Amalgamated Fund income would distort year on year comparisons, since it would place the income level at the mercy of the markets in any one year.

The University's Auditors are satisfied that the accounts are SORP-compliant. Consideration will however be given to improving the presentation of this matter in the accounts, with a view to even greater clarity.

VIII.  The University should review its accounting and budgeting procedures so that allocations can be compared against out-turn, and should review its reserves policies with a view to eliminating multiple reserves and contingencies.

The Board of Scrutiny has made a valid point about reserves; however, there are different types of reserves and contingencies, and different approaches to handling them need to be adopted.

The Council, in their Allocations Report for 2001-02 (Reporter, 2000-01, p. 865) referred to proposed changes to enable the Regent House to have a better overview of the University's total finances, rather than concentrating, as now, on unrestricted (Chest) income and expenditure. Paragraphs 49-50 of the Report outline revised arrangements for financial planning and reporting, including the need for strategic plans and a RAM.

A model for a more transparent resource allocation methodology (the RAM) has been developed, which will take account of out-turns and all sources of Faculty and Departmental income in determining allocations. Following consideration by the Planning and Resources Committee, it has been agreed that further consultation with the Chairmen of the Schools should take place before the document is circulated for widespread consultation.

With regard to paragraph 41 of the Board of Scrutiny's Report, as has been reported by the Council in their Allocations Report for several years, efforts continue to be made to increase the income available to the Chest by encouraging greater use of trust and special funds and by routinely requiring contributions from Faculties, Departments, and other institutions for non-recurrent expenditure. This policy is operated, however carefully, in the context of increasing devolution of financial responsibility and the various Government initiatives, such as the Science Research Investment Fund (SRIF), when the availability of a substantial departmental contribution, through reserves, has assisted a beneficial outcome for the University.

The Board of Scrutiny referred also to the reserves of CUP and UCLES. The Syndics of both bodies have recently considered their reserves policies and have discussed these with a working group appointed by the Council from members of the Finance Committee. The UCLES policy paper on reserves refers to figures taken from the 1999/2000 accounts (a year later than those considered by the Board of Scrutiny) but the principles stated are valid for both years. The paper analyses the balance sheet of the UCLES group in order to identify what proportion of the net assets should be regarded as being available to fund future investment and development needs, to provide a cushion against adverse circumstances, and to ensure that no financial liability would ever fall on general University funds. The analysis shows that part of the 'reserves' is tied up in the business or represents restricted funds that could only be applied for specific purposes. These assets comprise goodwill, property, plant equipment, working capital, and trust-type funds. The balance, which might be described as 'available reserves', represents 80% of the Group's operating costs in the financial year to 30 September 2000. The Syndics argue that this is a healthy but by no means excessive level of reserve for a risky international business. The Press, in a letter from the Chief Executive conveying the Syndicate's considered response, has pointed out that the figure quoted by the Board of Scrutiny was the entire balance sheet value of the net assets of the Press at 31 December 1999, excluding only the designated funds earmarked for the University. Accordingly, it includes all land and buildings and other fixed assets, all stock and work in progress, and debtors less creditors, as well as investments and bank balances, much of which are working capital, and all of which by Statute are 'controlled by the Press Syndicate and applied by them at their sole discretion for the purposes of the University Press'. Investments at the end of 1999 amounted to £29.4m and investments and bank balances taken together amounted to £49m. In their 2000 accounts the Press introduced a Statement on Risk Management which indicates that these capital funds are held to provide for Press growth and expansion, and to counteract potential business risk. The need to maintain and augment the reserves over time is a central requirement of the Press's business planning, especially since the current levels of capital funds are substantially less than the policy target of six and a half months' operational income.

Following consideration of these policies, and of a number of general issues relating to University reserves, the Finance Committee agreed that further discussion was necessary and the Treasurer undertook to set up a working group which would advise the University on a strategy which would allow the University to use its funds more flexibly and effectively subject to any statutory constraints. It was agreed that there should be representatives from the larger Departments on the working group. Such a group is unlikely to be able to start its work until early in the new year.

IX.  The Finance Committee should reconsider the University's policy on its depreciation of buildings and ensure that any future policy takes into account the actual state of the buildings and satisfies users of the accounts and members of the University that both expenditure on the buildings and the rate of depreciation is adequate to ensure that the preservation of the buildings stock is not compromised.

In summary the Board of Scrutiny raised two issues:

1. The depreciation charge on buildings was understated. It was not based on the current value of the University buildings but on the historic valuation as at 31 July 1994 (i.e. when buildings acquired pre-1988 were included in the University's accounts for the first time) and at the historic cost for buildings acquired thereafter.
2. The impact of this deemed understated depreciation charge was that inadequate provision was being made for the preservation of the University's building stock.

The Council have been advised by the Finance Committee that it should be clearly understood that depreciation is a measure of the cost or revalued amount of the economic benefits of tangible fixed assets consumed during an accounting period and is therefore a measure of consumption not valuation. It is not a measure of loss of value nor is it a means of providing a fund for fixed asset replacement.

Valuations under UK GAAP, determined by FRS 15 Tangible Fixed Assets, are neither prohibited nor compulsory. The requirement of FRS 15 is that any fixed asset revaluation must be applied both consistently over time and against classes of asset. Piecemeal revaluation is not permitted. To the extent that an entity chooses to revalue property, strict rules apply to the frequency and basis of valuation: full valuations must be carried out every five years, with interim valuations in between; valuations must also be carried out, or reviewed by, a qualified external valuer. The financial cost is consequently significant.

The question therefore to be answered is what economic benefit would the University obtain from regularly revaluing its property and does this outweigh the cost? The conventional argument for property revaluation is to secure debt finance but, in the case of Cambridge, this clearly does not apply. Once the University launches into regular revaluations they must be continued. The Finance Committee have advised the Council that they do not consider that the cost would be well spent. They also noted that FRS15 specifically excludes charitable organizations from this requirement.

The Council share the Board's concerns about the preservation of the University's building stock, and have commented on this matter in the recent Allocations Report (paragraphs 39 and 40, Reporter, 2000-01, p. 869). They were concerned at the implications of the lower than recommended provision for maintenance in 2001-02, but intend to restore this to the HEFCE recommended level or thereabouts in 2002-03.

X.  The Board recommends the publication on suitable websites, for access from all cam.ac.uk web addresses, of the agenda and minutes of unreserved business at the Council, the General Board, and Faculty Boards, and committees of these bodies.

The minutes of the General Board's Education Committee are now available to all cam.ac.uk addresses through the Education Section's website (http://www.admin.cam.ac.uk/offices/education/). It is expected that the minutes of other central bodies will follow later this academical year. Statutes and Ordinances, 2001, is also now available at http://www.admin.cam.ac.uk/cam-only/univ/so/.

XI.  The General Board's practice of meeting on a monthly cycle rather than fortnightly is contrary to the Statutes and the position should be regularized as quickly as possible.

Statute C, I, 9 provides that 'the General Board shall meet at least once a fortnight during full term, provided that the Chairman shall have the power to cancel any meeting if there is insufficient business'. The Board's timetable of the last two years of meeting three times a term is now established practice, although it has been pointed out to the Board of Scrutiny that particular business has necessitated meetings more frequently than implied by their recommendation. The Council and the Board have however agreed that an appropriate amendment of the Statute be brought forward at the same time as any further amendment which might be proposed by the Committee on Governance.


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Cambridge University Reporter, 21 November 2001
Copyright © 2001 The Chancellor, Masters and Scholars of the University of Cambridge.