Mr. Seamus McCarthy:

My office carries out audits of the annual financial statements of seven universities, 14 institutes of technology and six other third level education institutions. That work provides an overview of financial management and propriety issues across the third level education sector and allows us to identify issues that are common across a number of institutions and matters in individual institutions that are exceptional or unexpected. Special Report No. 78 was compiled to draw attention to a range of matters of potential sector-wide interest.

The third level sector as a whole receives State grants amounting to about €1.4 billion per year. This includes current, capital and research grant funding provided by the Higher Education Authority and the Department of Education and Skills. Grants in lieu of undergraduate student fees are part of this total. Further substantial State project funding for many of the institutions is provided in the form of research grants from public bodies such as Science Foundation Ireland and Enterprise Ireland.

At the end of the academic year 2011, it is estimated that the total cash to hand across universities and institutes was in excess of €700 million, held in commercial bank accounts. In addition to student fees paid in advance of the start of the academic year, these balances included substantial research project funding received in advance and held as deferred income. In responding to the report, the Higher Education Authority, HEA, pointed out that it has taken action to slow down payments in respect of its grant funding to take account of the institutions' cashflows at particular times of the year. The report concludes that it may be worthwhile reviewing the State's wider treasury management policy and considering the merits of providing for a sweeping up of surplus funding in third level institutions and other State bodies. Part of the balances held by institutions relate to advances of banking concession fees and pension related reserves.

Access to sizeable student and staff populations on campus represents a commercial opportunity for third level institutions. Most institutions receive concession fees from commercial banks in return for the right to deliver banking services on campus. The amount received across the sector averages around €10 million per year, often received in the form of lump sums for five or even ten year contracts. In most cases, the institutions assign revenue from the bank concessions for a range of current and future development activities, but the audits found situations where concession income was transferred directly to subsidiary companies and to restricted reserves rather than being accrued as annual income. The report concludes that there would be merit in a review of the application of such concession income across the sector to ensure there is an agreed State policy covering its use in accordance with wider education objectives.

Funded pension schemes in five universities closed to new entrants in 2005. From then on, new staff joined a university pay-as-you-go model pension scheme. Up to 2005, the HEA had included an additional 15% of salary costs in the annual core funding provided to the universities to fund the employer contributions to the pension funds. The normal practice in respect of pay-as-you-go model schemes is that employer contributions are not made, but the HEA continued to pay the additional 15% in respect of staff covered by the model schemes, which it asked the universities to hold in separate pension funds. At the end of September 2010, the funds held an estimated €46 million. The HEA pointed out that, separately, the universities were owed almost €12 million in respect of pension payments under the closed pension schemes, so it estimated the net surplus on pensions was around €34 million. The report concluded that this represents an advance of funding in excess of current requirements.

An employment control framework for the higher education sector was introduced in July 2009, replacing a blanket Government moratorium on all recruitment and promotion imposed across the public sector in March 2009. The framework restricted each institution in relation to the number of core staff employed in each grade up to 31 December 2010. Overall, the restrictions resulted in a reduction in staff numbers within the third level education sector by an estimated 7.3% between the end of 2008 and the end of 2010. This exceeded the target reduction of 6%. Over the same period, full-time student numbers increased by an estimated 10.5%.

After the moratorium and framework were imposed, Trinity College Dublin informed the HEA that it proposed to promote 27 academic staff following an internal promotion process.

The Higher Education Authority, HEA, advised the university that the employment control framework monitoring committee considered that it would be acting outside the framework in making those appointments and that financial penalties in the form of a reduced recurrent grant in 2011 could apply as a result. The university proceeded with the promotions with effect from 1 January 2011. Up to the time our report was completed, no penalties had been imposed on the university. The HEA will be able to advise the committee on the action taken subsequently.

Many third level education institutions have established subsidiary companies, which typically provide campus services such as catering, accommodation and sporting facilities. Universities produce consolidated financial statements incorporating the results of subsidiary companies, but some institutes of technology with subsidiaries do not. To ensure transparency and comparability, it would be desirable for institutions to adopt a consistent approach to reporting the results of subsidiaries. When the report was being completed, the HEA advised that work was under way to update the codes of governance for higher education bodies, including provisions in respect of the governance of subsidiaries. Specific issues were noted in respect of subsidiaries in Waterford Institute of Technology and Dublin City University. At Waterford Institute of Technology, a wide range of campus services is provided by a group of companies but the results are not consolidated in the financial statements of the institute. The HEA has requested the institute to review the position and submit proposals for any necessary changes in corporate governance. At Dublin City University, DCU, the results of 11 subsidiary companies are included in consolidated financial statements. Three DCU subsidiaries, including the company that runs the Helix arts centre, had accumulated substantial losses by September 2009. The balance sheets of two of the subsidiaries were repaired at September 2010 through capital contributions from DCU totalling €9.8 million. The university has committed to providing €100,000 per annum for 19 years to meet a funding shortfall for the other subsidiary, and I understand an annual grant of €500,000 is being paid to the Helix centre company. The presidents will be in a position to update the committee on the financial positions of the subsidiaries and any ongoing subsidies.

Foundations often are established with the aim of raising philanthropic funding for the associated third level institutions, and some universities have received very substantial philanthropic funding through their foundations. However, given the lack of discretionary income available to foundations, it is common practice for the institutions to provide funding or other support to their respective foundations to meet running costs. In some cases, the foundations have not succeeded in raising any significant funds. For example, Waterford Institute of Technology transferred a total of €550,000 to its foundation, which was spent in less than two years without significant donations being raised. Mary Immaculate College, Limerick transferred a total of €3.84 million to its foundation, including bank concession fee funds, for the acquisition of property along the college perimeter, even though the foundation was not set up as a property holding company. It would be desirable to ensure transfers from third level institutions to foundations are reported in a transparent manner and occur only on the basis of a demonstrated business case. The audit of the 2009-10 financial statements found breaches of procedures and lack of economy in transactions administered through the president's office in Waterford Institute of Technology. The chairman of the institute's governing authority commissioned an in-depth investigation of non-pay expenses in that office over the period 2004 to 2011. This found there were a number of instances of non-compliance with institute policies and procedures, including with regard to the procurement of taxi and public relations, PR, services, as well as expenses relating to travel and hospitality. The report concludes that the institute, the HEA and the Department of Education and Skills had taken appropriate steps after the matters surfaced.

The final matter to which I wish to refer relates to an update on the issue of remuneration of senior staff of universities in excess of ministerially approved levels. The fact there were such payments was reported upon in an earlier special report and most of the payments had ceased. However, there was disagreement about the amounts involved and whether and how recoupment would be effected. The Department and the HEA sought to carry out an exercise on a case-by-case basis relating to a five and a half year period to identify the amounts involved, in advance of deciding on what action to take on recoupment. My office agreed to assist by carrying out a validation process of the estimates, including advising on the design of the data-gathering methodology and sample-based testing of the completeness and accuracy of the returns. The estimates produced in most cases tested were found to be correct. The overall estimate amounted to a total of the order of €8 million. The highest amounts of remuneration in excess of ministerially approved levels were in UCD, UCC and Trinity. The verification testing found a number of cases in some universities where there was uncertainty about the approved level of remuneration and these were referred back to the HEA for further review and investigation. The chief executive of the HEA will be able to inform the committee of the results of its further deliberations on those cases when he appears next week. That probably is sufficient to outline what is in the report.