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 primary funding authority for the universities, institutes of technology, teacher training colleges and a number of other designated education bodies. Over 90% of the HEA's income comes directly from Vote 26 Education and Skills, with the balance largely consisting of research funding from Vote 32 Jobs, Enterprise and Innovation. The HEA had gross expenditure of €1.17 billion in 2015. As shown in the figure now on screen, the bulk of that expenditure was in the form of grants to education bodies for specified purposes - current spending, including fee recoupment to colleges; capital project funding at 4%; and research grants at 9%. I have issued a clear audit opinion in respect of the HEA's 2015 financial statements.

In parallel with its role of providing funding to the sector, the HEA has an oversight and regulatory role in respect of higher education institutions. However, the Department of Education and Skills retains overall responsibility for pay and pensions policy in the sector. In light of the series of committee meetings to examine the financial statements of a number of institutions, I propose now to outline a number of common issues that have been raised on audits within the third level education sector over recent years.

In accordance with accrual accounting standards, universities recognise on their balance sheets estimated accrued pension liabilities in respect of their current and former employees - an aggregate amount of around €7 billion at end September 2015. They recognise an equivalent amount as deferred State pension funding, reflecting their expectation that funding will be provided by the State in the future when required to meet pension liabilities as they fall due. This assumption is underpinned by statutory guarantee in respect of part of the liability, but some is not covered in this respect. My audit certificates for all seven universities draw attention to the assumptions inherent in this accounting treatment.

The accounting for pension liabilities in respect of institute of technology staff is different. Institutes do not directly pay pensions to their former staff. Instead, pension payments are funded directly from the education and skills Vote and paid on the Department's behalf on an agency basis by the pension section of the Department of Public Expenditure and Reform. The institutes, accordingly, do not accrue in their financial statements for estimated pension liabilities.

All the universities and some other large third level institutions have associated foundations or trusts that exist solely to raise, and hold, funds to be applied in support of activity undertaken by the respective educational body. The HEA has previously stated its view that the results of all such foundations and trusts should be consolidated into the accounts of the related educational body. While two universities, Trinity College and NUI Maynooth, currently consolidate the results of their foundations and trusts, the majority do not. The key consideration in accounting for these funds is the degree to which the institution controls the foundation or trust. Where there is conclusive evidence of control, consolidation is required. Where the funds held by the foundation or trust are material to the balance sheet but they have not been consolidated on the basis that the institution does not control them, the audit opinion draws attention to the accumulated assets.

A key focus for our audit is the need for open competition in the award of contracts. Audit certificates draw attention to cases where bodies have procured a material level of goods and services without appropriate competitive processes. We use a flat-rate value of €500,000 in aggregate per institution as the starting point for drawing attention to such cases. Non-competitive procurement has been reported in the most recently signed audit certificates for six universities and four institutes of technology. However, I would point out that the scale of the non-competitive procurement in the sector has reduced over time, as institutions have responded to our previous audit findings.

Over recent years, my audit certificates have highlighted the financial difficulties being experienced by certain institutes of technology. In some cases, the retained earnings of institutes have been significantly eroded by successive deficits over a number of years. In more serious cases, the accumulated deficits have wiped out previous retained earnings.

Where significant financial difficulties have been identified, the institutes concerned have included a disclosure note in their financial statements referring to the financial position and confirming the governing body's opinion that the entity remains a going concern. In those cases, the related audit certificates have drawn attention to the issue.

In November 2016, the HEA published the results of a review of the financial status of the institute of technology sector. The purpose of that review was to assess the overall financial health of institutions and set out an agreed action plan to deal with the issues raised. The chief executive will be able to update the committee on developments since the publication of the review.

Funding pressures have also become more evident in recent results within the university sector. In that regard, the committee will be aware of the report produced in March 2016, known as the Cassells report, which assessed the long-term funding requirements of the higher education system and identified a number of potential future funding options. Further to one of the recommendations in that report, I understand that a review of the HEA's recurrent funding allocation mechanism is under way so as to ensure that it supports overall priorities and objectives within the system.

Last month, I published a special report on financial reporting in the public sector. In it, I identified a number of factors that had contributed to recurring delays in the production of financial statements and the finalisation of audits for universities. The report identified third level institutions that had not completed their financial reporting for the 2013-14 academic year and prior years by the end of 2015. All but one of those audits has since been completed. The exception is the National College of Art and Design in respect of 2013-14.

I am glad to report that, since the end of 2015, progress has been made in bringing forward the timeliness of third level education financial reporting, although further work remains to be done. As of today, audit certificates have been issued in respect of 13 of the 14 institutes of technology for 2014-15. The audit of Waterford Institute of Technology for that year is still in progress. Four of the seven universities have presented their 2014-15 certified financial statements. Those yet to be finalised are Dublin City University, University College Cork and NUI Galway.

At the beginning of each session, both tomorrow and next Thursday, the key audit findings regarding individual institutions will be set out in brief opening remarks.