Mr. Seamus McCarthy:

The Higher Education Authority is the statutory planning and policy development body for higher education and research in Ireland. It is the funding authority for the universities, teacher training colleges, institutes of technology and a number of other designated education bodies and carries out a related oversight and regulatory role. It also has wide advisory powers throughout the third level education sector. The HEA disbursed over €1.2 billion in grants to third level institutions in 2013. Most of its income comes directly from Vote 26 for Education and Skills.

I have issued a clear audit opinion in respect of the HEA's 2013 financial statements. However, as in prior years, the audit opinion draws attention to the HEA practice of funding certain universities for notional employer pension contributions in respect of members of pay-as-you-go model pension schemes, and also allows those universities to retain the related employee pension contributions. The universities account for the accumulated funds on their balance sheets as sums due to the HEA. The balances held in the five universities concerned stood at €125 million at 30 September 2013 — up from €94 million at end September 2012. The HEA intends that the funds will be used by the universities to pay certain pension liabilities in the future, and thus they reduce the level of Exchequer grant funding that it will have to provide in the future. The HEA does not recognise the funds as assets on its own balance sheet.

The National College of Art and Design is one of the colleges that fall within the funding and oversight remit of the HEA. The college has existed in various forms for over 250 years. Its current structure was established under the National College of Art and Design Act 1971 and it is governed by a board appointed by the Minister for Education and Skills. Since 2011, it has been a recognised college of University College Dublin, UCD, which now validates the college's degrees.

In the 2012-13 academic year, the college had almost a thousand full-time students, and a significant programme of part-time continuing education courses. It has an annual turnover currently in the region of €20 million. In recent years, the college has received annual grant funding of around €10 million from the Higher Education Authority.

The timely presentation of independently-audited annual financial statements is a key mechanism in ensuring effective public accountability in respect of State funding. Section 15 of the 1971 Act that reconstituted the college requires the board to prepare annual financial statements and to present them to me for audit. The Act also requires the college to report to the Minister on an annual basis on its proceedings during the previous academic year.

Significant delays have occurred in the presentation by the board of draft financial statements for audit. In addition, there have been delays by the college in the provision of adequate explanations and information to allow audits to be completed. The result has been the elapse of up to 39 months between the end of the period of account and the audit certification of financial statements, as indicated in the figure now on screen.

My Office has also repeatedly raised with the college our concerns about the adequacy of controls and governance arrangements arising in the course of successive audits. These included no evidence of competitive tendering for almost all goods and services procured by the college; no evidence over many years that the board had carried out required annual reviews on the effectiveness of the system of internal financial control; and a minimal role for the college's audit committee and an inadequate internal audit function.

Unfortunately, it was evident during the 2009 and 2010 audits that the college's senior management and board were not addressing the accounting and governance deficiencies or taking adequate mitigating actions in a timely way. As a result, I decided to report formally to Dáil Éireann my concerns about the ongoing accountability and governance deficiencies at the college. This has resulted in the special report that is before the committee today.

In parallel with the drafting of the report, and in order not to allow a further build-up of audit arrears, we sought to proceed with the audit of the college's financial statements for the academic year ended 30 September 2011. Having received the draft financial statements in December 2013, we started the audit fieldwork in February 2014 but had to suspend the audit because we found that the draft financial statements contained material errors, and not all the information and explanations required for the audit could be provided to us. The audit recommenced in July 2014 but significant issues remained to be resolved.

This required additional audit testing and the provision of advice to the college to assist it in finalising the financial statements. I eventually signed off on the audit on 28 December 2014. Significant weaknesses in the college's accounting system, compounded by the departure from the college of experienced accounting staff, resulted in considerable challenges during the audit of the 2011 financial statements. By carrying out substantial additional testing, the audit was able to gain reasonable assurance in respect of areas such as State grant income, student fee income, expenses, debtors, creditors and cash and bank balances. However, in the end, the books and records of the college did not enable the financial statements to be readily and properly audited in all material respects. Specifically, I qualified my opinion on the financial statements because the audit was unable to obtain sufficient appropriate audit evidence regarding the amounts recognised in respect of staff pension liabilities, or to support fully the breakdown of certain income and expenditure classifications.

The accounting and governance weaknesses have been acknowledged by the board and, as explained in the 2011 statement on internal financial control, comprehensive steps are now being taken by the college to address them. Progress in implementing the required improvements will be monitored by my office in future audits. I welcome the formal commitment expressed by the board in that regard and my office has undertaken to work constructively with the college to help it to bring its financial accounting up to date as speedily as possible. The special report also examines the response of the HEA to the ongoing delay in the presentation of audited financial statements and other governance issues in the college. Annual governance statements were submitted to the HEA by the college each year from 2009 to 2013. These disclosed the college's ongoing accounting delays and were not fully compliant with the HEA's requirements for such governance statements, but there is no evidence that concerns about the college's governance were highlighted to the board of the HEA. While the HEA has stated that it did ask college staff from time to time about the delays in accounts production, in my view, the HEA should have been more active in requiring the college to remedy the situation. It seems that it was only after my office formally sought the views of the HEA on the matter that it escalated the issue to the appropriate level with the college. More generally, my office has commenced an examination of oversight by the HEA of higher education institutions. This looks at the oversight framework the HEA has in place and how well the higher education institutions are adhering to it. We are also examining how the HEA processes the information it receives from the institutions and the action it takes on foot of that analysis. I expect to prepare a special report on the results of that examination in due course.