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Stiff rules to ensure reporting of fraud;FE Focus

Colleges will be required to set upindependent units to administer internalauditing. Ngaio Crequer reports.

COLLEGE internal auditors must report, without delay, any serious financial weaknesses, significant frauds or control breakdowns to the chief executive, the Further Education Funding Council has warned.

A new code of practice on audit defines significant fraud as involving funds of more than pound;10,000; when the particulars of the case are novel, unusual or complex; or where there is likely to be great public interest because of the nature of the fraud or the people involved. There also could be circumstances that do not fit this definition, in which case colleges should seek advice from the council's chief auditor.

The code sets out colleges' responsibilities for both internal and external audit and specifies their legal duties. Colleges should have an audit committee of at least three members, one of whom should have relevant skills and membership.

"Members of the audit committee must not have executive authority in the college, nor be members of the college's finance committee or equivalent... Objectivity and independence is essential for the successful operation of the audit committee," the code states.

Each governing body should appoint an internal audit service that is distinct from the external auditor and separate from college management, even if provided in-house, and has no other responsibilities than internal auditing.

Its work must include the whole system of internal control of the college, including all operations, resources, personnel, services and responsibilities to other bodies. It must include activities delivered by college companies, any collaborative provision, and even work not funded by the council.

The audit service must have unrestricted access to all documents, records, assets, personnel and premises of the college, its companies and to any relevant documents of outward collaborators.

The code says that through its contract with the internal audit provider, colleges must allow the funding council unrestricted access "to all records, information and assets which the council considers necessary to fulfil its responsibilities".

There should also be an external auditor, whose duty is to report on the "truth and fairness" of the income and expenditure for the year, and the financial position of the college. On occasion, the council's audit service and the National Audit Office may wish to meet the external auditor and access should not be limited in any way, although advance notice will be given.

Both the internal audit service and the external auditor should be selected under the same procedures - colleges should hold a competition for quality and price at least every five years, or when there is a significant change such as a merger.

Colleges must have a written policy on the process to be followed when evidence of any potential irregularity, including fraud, corruption or impropriety, is discovered.

Where the audit committee feels there is evidence of fraud or irregularity, it should be notified to the principal and the chair of the governing body and should be raised at the next governors' meeting. If the fraud is considered significant, they should consider holding a special meeting.

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