In January the Universities and Colleges Admissions Service (Ucas) reported a 7.4 per cent drop in UK university applications (a key month because 15 January is an applications deadline). Was this a harbinger that student numbers were dwindling as a result of the new tuition fees? Probably not, said Ucas’s chief executive, Mary Curnock Cook: “The more detailed analysis of application rates for young people takes account of population changes. This shows a fall of just one percentage point in the application rate in England, with little change across the rest of the UK.” 

Yet it’s not quite business as usual in higher education. The sector’s internal auditors are agreed that the pace of change is clearly accelerating, presenting a range of new risks that they must provide assurance against.

Battle of the brains
Universities are competing with each other more than ever to attract students. More of a concern, though, may be the competition from new entrants into the market in the form of private sector “for-profit” providers. Universities will also face competition from new delivery mechanisms that provide education via mass-market, low-cost online models of the kind being pioneered by some leading US universities. Their impact cannot be accurately assessed as yet.

Not that it’s a question of universities needing to become commercial. As Hamish McKay, chief internal auditor at the University of Edinburgh, points out, UK higher education is a £27bn sector. 

“All universities already have to be commercially focused,” he notes.
What McKay sees happening is growing pressure to adopt a greater consumer orientation.

“The need to support or recognise customers’ requirements may well have ramped up in recent times with the advent of higher fees and, generally, the greater demands and expectations of a consumer society,” he says. “All universities have to adjust to reflect that.” 

It puts a new pressure on them to cultivate and safeguard a positive reputation, brand and image. In this regard, another fairly new risk to consider is that presented by league tables such as the national student survey.

Financial sustainability
It also follows that a failure to be competitive will exacerbate risks concerning financial sustainability. “Universities are going to face challenges in terms of managing their financial position over the next couple of years, as the real behaviour of students and their purchasing choices become apparent,” says Stan Farmer, chief auditor at the Open University. 

This will pose a stark risk in due course for some universities. “The question that has yet to be answered is whether or not an institution will be allowed to go bust,” says Steve Stanbury, director of internal audit at City University in London. This is not such a remote contingency. As he points out, nine per cent of higher education institutions have had a deficit in at least two of the past three years. 

It’s not only the amount of money coming through their doors that universities will need to manage. They must also pay more attention to when it comes, because in many cases they’ll move from a large funder offering predictable cash flows – for example, the Higher Education Funding Council for England – to several funders and more sporadic income. Much of their funding will come from the Student Loans Company and half of this won’t arrive until May 2013, as a result of a restructuring of the payments schedule.  

That will certainly have implications for cash flow, according to Stanbury. “Internal audit will need to assure the audit committee that there are adequate and effective systems for the collection of tuition fee income,” he says. 

Another facet of financial sustainability, McKay notes, is the need to diversify income sources. In this respect, overseas students make a significant contribution to many universities: at Edinburgh, they make up nearly a fifth of the student population; at City University, about twice that proportion. It is likely that the competition to attract overseas students will increase.

McKay also cites another, related and relatively new risk: compliance with UK Border Agency (UKBA) regulations. 

“To maintain a UKBA licence, you have to satisfy the agency about your processes and procedures,” he explains. “ There would be a lot of money at stake if you were to lose your licence and had to forego the income that you would normally receive from overseas students.” 

Internal auditors, he notes, must look at where the risks are and react appropriately. And they must adapt their approach to a changing landscape.

A learning process
That changing landscape is asking internal auditors to be much defter than they’ve needed to be in the past. For one thing, many of the systems and processes that universities depend upon are changing rapidly and significantly. This gives rise to new strategies and policies, and more new risks. 

Just one example of systems change is provided by the University of Edinburgh: it is setting up a new protocol to determine students’ entitlement to Scottish residency status. 

“We have new procedures,” says McKay. “In internal audit we need to provide assurance that these are working effectively and equitably.”

Likewise, systems changes are being made at the Open University, where traditionally academic offers were made on a module-by-module basis. Under the new regime, in order to access loan funding, students will need to register for a qualification instead.

Consequently, the university’s processes are being adapted to accommodate both the existing modular pathway and the new qualification-based pathway. 

This sort of development gives rise to moving targets for auditors. As Farmer points out, six months from now, contexts, risks and a university’s responses to these will have changed. As a result, he says: “Internal auditors need to remain fleet of foot in how we deploy our methodologies so that we can make sure that the opinions and the assurance we provide are relevant, timely and useful for the people that need them.” 

A further consideration is that internal audit teams will have to maintain the level of their skills, knowledge and organisational understanding, and ensure that these keep pace with the changes. Part of their role will be to look at how their universities are identifying and assessing new marketing opportunities, for example, so internal auditors will have to work across those new disciplines. 

Lastly, although a lot is changing, much will remain the same. University auditors will have to remember not to lose sight of their core assurance role.  

“For me at least,” says Farmer, “in designing my audit programme, I have to make sure that there’s an appropriate balance between the key strategic risks that are related to the strategic change agenda and those ongoing operational risks that still need to be managed. Getting that balance right is quite tricky at the moment.”

For more information
Stan Farmer is a member of the IIA’s Heads of Internal Audit Service. Visit www.iia.org.uk/HIAS for details. To have your say on this and other issues, visit www.auditandrisk.org.uk

>> The role of CHEIA
The remit of the Council of Higher Education Internal Auditors (CHEIA) is to provide a network to aid the professional development of all internal audit professionals in the sector and to promulgate best practice. The council was set up two decades ago, but has become more active and influential in the past two years.

“We now have dedicated support staff within CHEIA helping to accelerate the dissemination of good practice in the sector,” says Hamish McKay, chief internal auditor at the University of Edinburgh and vice- chair of the council.

>> Reputation management
The national student survey (NSS), which canvasses all final-year undergraduates in the UK, has become a highly influential barometer, helping prospective students to decide which university to choose. 

As a consequence, universities are paying more and more attention to the NSS and, for their part, internal auditors in the sector are evaluating how universities respond to feedback.

“These ratings are taken account of quite significantly,” notes Hamish McKay at the University of Edinburgh. “On a commercial basis, it would be folly for any university to ignore a finding that said, for example, that students didn’t enjoy the experience at their institution.” 

Likewise, the NSS has been on Steve Stanbury’s radar at City University for a couple of years. “It’s vital that the university responds to the points raised by students and takes action on those, because of the NSS’s importance in influencing students’ decisions,” he says.

Stan Farmer at the Open University can perhaps afford to be less concerned about the NSS – simply because the university has ranked in the top three every year since the survey began in 2005. “Students enjoy our courses and recognise their quality – and the survey is a good indicator of that,” he says. “But this doesn’t mean that we don’t continue to strive to deliver an outstanding experience for our students.”