Minutes of the Meeting of the Audit Committee of the Council, Wednesday, 29Th March 2017

AUDIT COMMITTEE

Minutes of the meeting of the Audit Committee of the Council, Wednesday, 29th March 2017

PRESENT:Rob Perrins (Chair)

Amanda Allen Sanjay Khullar

Toby LewisSurinder Sharma

IN ATTENDANCE:Kylla BellinghallAlan Charters

Alan HawkesworthKeith Humphreys

Sam LiffordGeraldine Rutter

Neil ScottJohn Walter (Secretary)

APOLOGIES:Professor Helen HigsonStuart Doughty

Adam Richards

GOVERNANCE MATTERS

WELCOME

17/1RESOLVED:

To welcome Toby Lewis as a new member; Keith Humphreys, Head of Financial Systems; and Kylla Bellinghall, Partner, and Sam Lifford, Senior Manager, from BDO.

DIRECTOR OF FINANCE

17/2NOTED:

That Rob Fekete, previous Director of Finance, had recently left Aston to take up the post of Chief Financial Officer (CFO) at Staffordshire University. The process of appointing a successor was progressing well: the post had been advertised and interviews arranged.

EXTERNAL AUDITORS

17/3NOTED:

That colleagues from BDO had prepared engagement letters and were in the process of preparing a detailed timetable for the work in preparation for the year end. Members requested that consideration be given at an early stage to any potential going concern issues arising from pension schemes and implications for banking covenants.

ACTION:External Auditors to give early consideration to implications of the pension deficits in relation to the financialcovenantsunderpinningAston’sloanagreementsinthecontextofFRS102

DECLARATIONS OF INTEREST

17/4NOTED:

That there were no new declarations of interest from members, or from those in attendance, with respect to any agenda items.

MINUTES

17/5RESOLVED:

That the Minutes of the meeting of the Committee held on 23rd November 2016be approved and that they be signed by the Chair.

MATTERS ARISING

17/6RECEIVED:

Paper AU/17/1, a summary of matters arising from the minutes of the previous meeting.

Recommendations to Council (Minutes 16/65-16/75)

17/7NOTED:

That Council (28.11.16) had resolved:

i)That the University’s Financial Statements for 2015/16 be approved.

ii)That the letter of representation to KPMG be approved forsignature by the Pro-Chancellor and Chair of Council onbehalf of the University.

iii)That the audited accounts of Conference Aston Limited and Optimus Energy Limited for the year ended 31st July 2016 be approved for submission to Companies House.

iv)That the Audit Committee’s Annual Report to the Council for 2015/16, which included the Value for Money Report, beapproved and that it be submitted to HEFCE.

v)That the Accountable Officer’s Assurance Return for 2015/16 be approved and that it be signed by the Vice-Chancellor and Chief Executive for submission to HEFCE.

Ethical Purchasing Policy (Minute 16/78)

17/8RECEIVED:

A report that that that the Internal Audit review of purchasing included a review of the effectiveness of the University’s ethicalpurchasing policy and arrangements.

Surinder Sharmawas providing feedback to the Procurement Team on the procurement questionnaire to ensure that it effectively covered Modern Slavery Act requirements.

Aston University Pension Scheme (AUPS) and the Universities Superannuation Scheme (Minute 16/90)

17/9RECEIVED:

An oral report from the CFO that the University would shortly be consulting informally with the Trustees and trade unions concerning a preferred option for addressing the growing pension deficit and the future financial sustainability of the Aston University Pension Scheme (AUPS) following the latest AUPS triennial valuation,which showed the deficit had increased toc£12 million. The University would take into account any comments or suggestions from the Trustees and unions before moving to a formal consultation stage. The University would undertake due diligence and seek legal advice where appropriate. The Committee would be provided with regular reports on progress with the preparation of formal proposals and the negotiations with staff, Unions and trustees.

The national USS pension scheme was expected to show a similar large deficit increase at its next revaluation in March 2018, which could raise Aston’s USS deficit to £20 million. The Trustees would be likely to ascertain the willingness of employers to increase further their contribution to address the deficit, which was very unlikely to be forthcoming.

Banking Covenants

17/10RESOLVED:

i)That the University should complete the process of obtaining written confirmation that it was not in breach of the financialcovenantsunderpinningitsloanagreementsinthecontextofFRS102, which brought the pension deficit on to the balance sheet.

ACTION:CFO to obtain written confirmation from KPMG and Barclays Bank that Aston continues to meet covenant requirements

ii)That the University should prepare some scenarios on the impact of the pension deficits and the likely impact on banking covenants.

ACTION: CFO to prepare scenarios on the impact of pension deficits on banking covenants

Aston Student Villages

17/11RECEIVED:

An oral report from the CFO that the sale of Aston Student Villages (ASV) to Unite Students, a specialist provider of student accommodation, had been completed by Lloyds Bank. All students had been informed that the change of ownership would have no impact on their tenancy, and that there would be no changes to accommodation arrangements, rent, payment terms or contractual rights for the duration of the current academic year. The University had negotiated a one-year nominations agreement with Unite for 2017/18 for 1950 rooms for first year students, with terms similar to previous nominations agreements. The University would take external advice and adopt a formal procurement process over the provision of longer-term student accommodation arrangements.

Aston Medical School

17/12RECEIVED:

An oral report from the CFO on progress with the implementation of AMS. It was noted that the School has passed Stage 4 of the GMC accreditation process and was currently awaiting a date for Stage 5, the inspection visit, which would take place before the final approval would be considered by the GMC’s Council in July 2017.The negotiation of Service Level Agreements with hospitals and GPs for the provision of clinical placements was progressing well. The Government had launched a consultation on expanding undergraduate medical education. The proposals included the provision of 1500 additional funded places, 500 of which would be allocated formulaically to HEFCE-fundable medical schools in 2018/19, and there would be a competitive bidding process for the remaining 1,000 places which might allow Aston to bid for places to start as early as 2018/19. Another proposal could remove the limit on the number of international medical students that universities could recruit, althoughfrom 2018/19 new international students would be required to fund their own clinical placements, in addition to the tuition and living costs they currently paid. This had the potential to make recruitment of international medical students much more competitive.

BUSINESS FOR DECISION/APPROVAL

INTERNAL AUDIT

Internal Audit Reports

17/13CONSIDERED:

The following reports from the Internal Auditors:

Internal Audit Progress Report (Paper AU/17/2a)

17/14NOTED:

That delivery of the Internal Audit Plan was on track, although the review of collaborations and partnerships had been deferred following discussions with the University Executive and replaced by the review of arrangements with ENGIE.

Review of IT Disaster Recovery Arrangements (Paper AU/17/2b)

17/15NOTED:

• That the objective of this review had been to assess the effectiveness of theprocesses and controls supporting the delivery of the University’sIT disaster recovery (ITDR) arrangements.
• That the Auditors had raised one high and two medium rated recommendations. Therecommendations, if implemented, would improve the University’s CorporateGovernance and Corporate Risk Management arrangements.
• That significant strategic changes had been made to the businesscontinuity programme (BCP) in recent years and theUniversity was at the early stages of redeveloping its BCP and in turn, the ITDR programme which supported
• That the Auditors findings reflect the current low level of maturity and under-investment in developing Aston’s ITDR programme. Specifically:

• Although the University’s IT requirements had been captured, they had not been fully agreed, validated or included in any plans or strategies developed by the IT Services team.
• IT Service Continuity documentation and supporting Universityplans were in some places inadequate and/or not maintained inline with defined review cycles.
• There was not a comprehensive testing strategy and programmein place to validate the ITDR plans.

• The audit had noted some areas of good practice regarding the backup and restoration processes and resilience of the IT infrastructurein place.
• That the current effectiveness of Aston’s current ITDR arrangements would rank it within the bottom half for the HE sector. IT expenditure on staffing and non-pay items was also below the sector average.
• That the Executive accepted the audit findings and recommendations, and had agreed a set of actions and timescales to address them. The timescales for the work reflected the need to plan the work around maintaining business as usual operations during term time and within staffing constraints.
• That given the risk that critical IT services and applications might not be recovered in a timely manner, prolonging and increasing the potential impact of a disruption on key operations of the University, members felt that the Executive should review the timescales for the planned actions in response to the Auditors’ comments and consider if external expertise could help to expedite the programme. This should be possible given that most of the University’s applications were commercially available packages widely used in the sector.
• That members, in noting the ongoing need to continue to improve IT security and resilience together with the need to address these new ITDR issues, asked if the University had a strategic plan to deliver the IT resources and services necessary to support Aston’s evolving needs in a rapidly changing technical and educational environment. The Chief of Operations and Estates (CEO) reported that a costed strategic plan was in place for the period to 2018, and a new longer term IT strategic plan was being developed which would meet the University’s overall objectives going forward.

17/16RESOLVED:

That the Executive should review the timescales for the planned actions in response to the Auditors’ comments and consider if external expertise could help to expedite the programme

ACTION: COE

Review of arrangements with ENGIE (Paper AU/17/2c)

17/17NOTED:

• That the University had entered into a 25-year Project Agreement with ENGIE in 2008 for the long term provision of decentralised energy. The Contract was for the upgrade of the existing boiler house and pipework (design, build and finance) and the ongoing operation of the decentralised energysystem. The scheme supplied the campus which also included Aston Student Village (ASV) and the AstonUniversity Conference Centre (‘Conference Aston’).
• That the objective of this review was in two parts:

1. Review of key contract documents and assessment of the process and controls in placesurrounding the management of the ENGIE Contract;

2. Review of the current commercial and financial aspects of the contract.

• The Auditors raised two high, two medium and three low risk-rated recommendations. Therecommendations, if implemented, would improve the University’s Financial Controls,Value for Money (VfM), Risk Management and Corporate Governance arrangements.
• The contract management activities supporting the University’s Contract with ENGIE had developed overtime to focus on those activities and processes where, in the experience of the Deputy Director of Estates(Engineering and Sustainability), greater oversight and day-to-day involvement had been needed to ensure theContract operated effectively. There were areas where the University’s current controlactivities could be extended to increase the level of validation of charges received from the supplier and tomore formally monitor other aspects of the supplier’s performance against the Contract’srequirements,including areas such as formal performance monitoring and management.The imminent retirement of the Deputy Director of Estates (Engineering and Sustainability) was likely to have an impact on the dynamic of the relationship with the supplier. There was a risk that a large amount of knowledge and experience of the Contract, how it had operated for the Universityand any decisions/agreements that had been made over the Contract life to-date would be lost. Potentialchanges to the scheme itself following the disposal of ASV to Unite, expansion into the Birmingham Cityscheme and any future contract renegotiation would also require the relevant technical expertise andknowledge.Having a clear vision of ongoing governance and oversight of the contract, a robust, timely and appropriatehandover process and more formalised processes and controls would be needed to support greater control overthe Contract going forward.
• The review of the Contract indicatedthat while it reflected market norms at the time it was signed, marketpractice had developed and an equivalent contract in the current day would typically allow for greater risk transfer andmore flexibility to vary arrangements. It also assumed that all activity would be through the University, there was no allowance in the Contract for ‘locations’ to be removed other than through full termination. ENGIE currently raised separate invoices to the University, ASV and Conference Aston. The Contract assumed all invoicing, andtherefore obligation to settle those invoices, rested with the University. It would be appropriate to align theContract to current practices (subject to any further change with ASV) when the agreement was nextconsidered.
• The Contract provided an opportunity to negotiate some changes on a five-yearly basis.Currently any variation to the Contract had to be agreed by both parties ‘acting reasonably’. This meant that, in normal course of business, it was likely to be challenging for the University to make changes to thecontractual arrangements without having to pay a significant financial premium to incentivise ENGIE tomake changes. However, there were proposals which could lead to the Aston scheme beingincorporated as part of a broader Birmingham decentralised energy system. As the University would need to consent to contractual changes to facilitate this, these discussions had thepotential to bring ENGIE to the negotiating table and potentially allow the University to seek changes toother parts of the commercial arrangements as part of any change to the Contract.
• That the Executive accepted the audit findings and recommendations, and had agreed a set of actions and timescales to address them. These included appropriate shadowing of the Deputy Director of Estates (Engineering and Sustainability) by the Energy, Environment and Sustainability Manager and the Deputy Director of Estates to ensure that his knowledge and experience were transferred and that governance and oversight arrangements were in place going forward. In addition, the Deputy Director of Estates (Engineering and Sustainability) had agreed to provide continued technical support in an advisory capacity post-retirement. The University could seek external technical and legal advice on the provision of power and energy going forward. The University would seek to renegotiate with ENGIE the contract terms, to ensure that they reflected current practices and were fit for purpose in relation to current and future plans for the scheme, if such changes are negotiable under the contract.

ACTION: COE

Review of Procurement and Accounts Payable (Paper AU/17/2d)

17/18NOTED:

• That the objective of this review was to assess the design and operating effectiveness of the University’s keyprocurement and accounts payable controls, including the new controls implemented in December 2016.
• That the Auditors had raised four medium and two low rated recommendations. Therecommendations, if implemented, would improve the University’s Risk Management,Value for Money, Financial Controls and Corporate Governance arrangements.
• That the Executive accepted the audit findings and recommendations, and had agreed a set of actions and timescales to address them.The Procurement Policy would be updated to clarify where the Schools and departments would be required to seek the Procurement Team’s support with annual supplier spend lower than £50,000 in value. The threshold for a single quote would be increased from £10,000 to £30,000. All expenditure between £30,000 and £50,000 would continue to go through the procurement reporting process (currently all expenditure over £10,000). The Aston Financial Authority Limits and Procurement Policies would be amended to reflect this change by August 2017. A reporting structure would be agreed to highlight any noncompliant procurements above £30,000. A system was to be implemented to identify suppliers included in a payment run, where a change of bank details had takenplace. Efforts would continue to reduce the number of manual payments that needed to be processed within Payroll.

Managing Risk in Higher Education Paper (Paper AU/17/2e)

17/19NOTED:

That this paper presented thefindings of PwC’s benchmarking study of 36 HEIs, identifying their significant risksand how those risks were beingmanaged.It also highlighted developments and trends in risk management practice across the sector, and lessons to be learned from developments in the commercial sector and beyond, including the development of risk management to a broader concept ofsustainability and business resilience. Members were reassured that Aston’s approach to risk management was broadly consistent with that of the sector.

17/20RESOLVED:

To thank PWC colleagues for this informative and useful report which would inform the University’s consideration of its approach to risk management going forward.

Progress in Responding to Internal and External Auditors’ Recommendations

17/21CONSIDERED:

Paper AU/17/3 containing a report on actions taken by the University in response to internal and external audit recommendations for identified weaknesses classified as either high or medium level issues. The actions had not yet been validated by the internal auditors.

17/22RESOLVED:

That that the format of the report on actions taken by the University in response to internal and external audit recommendations should be reviewed and revised to facilitate the identification of the level of risk, importance and urgency associated with any outstanding actions.