the administration of .student loans - national audit office · evaluation of the student loans...

NATIONAL AUDIT OFFICE

REPORTBYTHE COMPTROLLER AND AUDITOR GENERAL

The Administration of .Student Loans

ORDEREDBY THEHOUSEOFCOMMONS TOBEPRINTED llJANUARY1993

LONDOkHMSO 371 f6.75 NET

THE ADMINISTRATION OF STUDENT LOANS

This report has been prepared under Section 6 of the National Audit Act 1983 for presentation to the House of Commons in accordance with Section 9 of the Act.

John Bourn Comptroller and Auditor General

National Audit Office 23 December 1992

The Comptroller and Auditor General is the head of the National Audit Office employing some 900 staff. He, and the NAO, are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources.


Contents

Summary and conclusions

Part I: Introduction

Part 2: Establishment of the Student Loans Company

Part 3: Financial control and performance

Annexes

A. Higher Education Institutions visited by the National Audit Office

B. Financial control of the Student Loans Company

C. Student Loans Company Reports to the Department

Pages

1

fi

10

20

28

29

35


Summary and conclusions

In its White Paper “Top-up Loans for Students” (Cm 520) presented to Parliament in November 1988, the Government announced its intention to introduce new arrangements for helping students in higher education to meet their living costs. In addition to the existing maintenance grant arrangements, students attending full-time courses of higher education below postgraduate level were to be offered top-up loans with effect from the academic year 1990/91.

In the the White Paper, the Government proposed that the average full-year loan entitlement in the first year of the loans scheme would be some !Z420 per student. The basic rates of maintenance grant would increase for the last time at the start of the academic year 1990/91. From the academic year 1991/92 onwards, the basic rates of maintenance grant were to be frozen in cash terms at their 1990/91 academic year levels. The parental contribution was also to be frozen for those parents whose income rose in line with average earnings, while the value of the loan facility would increase until it was approximately equal to the value of the basic grant and parental contribution taken together.

To ensure that eligible students could apply for and receive top-up loans by autumn 1990, the Government set in hand arrangements for the establishment of an “administrative mechanism”. This eventually took the form of a company, Student Loans Company Limited, which was initially owned by a group of banks. Following the banks’ withdrawal from the loans scheme, the Company was taken into Government ownership in December 1989.

Of the education departments, the Department of Education and Science, now the Department for Education (the Department), played the most prominent role during the development of the loans scheme and the establishment of the Student Loans Company, and funded the associated costs. The Scgttish Office Education Department and the Department of Education for Northern Ireland also played a role, to varying degrees. [Collectively, this Report refers to the Education Departments as “the Departments”).

From September 1999, when the Student Loans Company opened for business, responsibility for funding its operational costs and the cost of the loans themselves became the shared responsibility of the Secretary of State for Education and Science, the Secretary of State for Scotland, and the Department of Education for Northern Ireland. Total expenditure on the scheme including start-up costs, operational costs and loans to students (excluding VAT) was !Z55 million between 1 May 1989 and 31 March 1991, and El39 million between 1 April 1991 and 31 March 1992. Of these, the start-up costs comprised E9.3 million before 31 March 1991 and ~60.6 million thereafter.

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6 Management Consultants Price Waterhouse played a major role in the development of the Student Loans Company. They undertook an initial feasibility study into the administration of the scheme; were involved in the preparatory work for the establishment of the Company: and worked for the Company until summer 1990. From January 1990, the Company’s newly appointed executives progressively took over from Price Waterhouse responsibility for the development and running of the Company. As a result, the number of Price Waterhouse staff working for the Company fell over time, and they had largely completed their work for the Company by June 1990. Price Waterhouse were paid E3.049 million [including VAT) for their services.

7 Against this background the National Audit Office reviewed the arrangements made respectively by the Departments and thee Student Loans Company for securing economy and efficiency in the setting up and operation of the Student Loans Company; and the controls which the Department and the Company established to safeguard public funds. The main findings and conclusions are set out below.

On the 8 The National Audit Office found that: establishment of the Student Loans

(a] The Committee of London and Scottish Bankers commissioned

Company consultants, Price Waterhouse, following competition, to undertake the initial feasibility study (costing E23,OOO including VAT) into the set-up arrangements for the loans scheme. The Committee awarded the remaining work (costing some E3.026 million including VAT) to Price Waterhouse without further competition because they considered that this was essential if a properly tested loans scheme was to be delivered on time. The Secretary of State agreed to this course of action on 30 June 1989 (paragraphs 2.10 to 2.13);

(b) Although payments to the consultants for the first two stages of their consultancy were in line with their estimates, the bills submitted for the third and final stage exceeded the VAT-inclusive upper limit of their estimates by E428,000, or 19.7 per cent. This arose from additional work which theStudent Loans Campany agreed that the consultants should provide on a ‘time and materials’ basis at their agreed daily fee rates. The Company devised and implemented various ways to minimise the costs (paragraphs 2.19 to 2.21);

(c) On the advice of its consultants, the Student Loans Company leased from the outset enough accommodation to meet its needs for the medium term, but more than it needed at first, in the knowledge that it would take on more staff as the number of borrowers repaying their loans grew. The Company intended to sub-let that part of the accommodation which it would not need initially (paragraphs 2.22 to 2.27);

(d) An amendment to the computer specification cost E92,000, including VAT. It enabled the Company to calculate borrowers’ repayments in a more appropriate way. The Company’s consultants accepted a large measure of responsibility for the need to make this amendment. Nevertheless, the Department did not seek financial redress (paragraphs 2.28 to 2.30);

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(e) The Committee of London and Scottish Bankers set up a working group, “FISCOS”, to oversee the early development of the student loans scheme. After entering contract negotiations, Electronic Data Systems Limited told the FISCOS Tender Panel that they had erroneously omitted VAT when preparing their tender to supply a computerised central loans system to the Company. They sought to increase the amount of their tender by El.7 million. However, the Tender Panel succeeded in limiting the increase to El.2 million. The revised tender remained significantly cheaper than the next lowest bid (paragraphs 2.31 to 2.35);

(f) The Central Loans System was based on an existing computer system which was subsequently tailored to meet the Company’s specific needs. Further changes to the system were occasioned during the passage through Parliament of the primary legislation governing-the loans scheme. By May 1990, the cost of these further system changes, including the one to which sub-paragraph (d) refers, was !Z555,000 (excluding VAT). The Company’s senior management subsequently introduced procedures which led to significant reductions in the proposed cost of system changes. These procedures will allaw the Company to exercise continuing control over future development costs [paragraphs 2.36 to 2.42).

On financial control 9 In the first half of 1991, the National Audit Office undertook an evaluation of the Student Loans Company’s financial control procedures then operational. In October 1992, at the Company’s request, the National Audit Office examined the revised systems for handling applications for deferment and a possible revision to the application process. The latter exercise also gave the National Audit Office an opportunity-to consider a separate review of computer security which the Company had commissioned from KPMG Peat Marwick. The National Audit Office plan to evaluate the systems for handling loan repayments, defaults and cancellations early in 1993 [paragraphs 3.5 to 3.6).

10 The National Audit Office’s evaluation in 1991 found the Company’s procedures to be basically sound. In many areas, the National Audit Office’s tests uncovered no significant weaknesses. However, the National Audit Office identified scope for improvements in certain areas, such as management controls and reconciliation procedures. The Company has taken swift.and appropriate action on all the significant shortcomings identified in 1991. The more recent examination revealed some weaknesses in the extent of testing of the deferment system before it was implemented in early 1992. The Company was fully aware of these and was taking satisfactory remedial action (paragraphs 3.7 to 3.12).

11 KPMG Peat Marwick’s work for the Company had uncovered some weaknesses in computer security and related matters. The Company responded positively to KPMG Peat Marwick’s recommendations by drawing up a prioritised action plan and setting in hand remedial action. At the time of the National Audit Office’s more recent examination, the

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Company had remedied a significant number of the weaknesses found by KPMG Peat Marwick. It had not had enough time to remedy the remainder (paragraphs 3.14 to 3.15).

On measures of performance

12 The Government’s first, and necessarily cautious, planning hypothesis was that eligible students would take up 80 per cent of the maximum loan facility available each academic year. In the event, the actual take-up rate in the first year was 28 per cent. In the light of this, the Department assumed for planning purposes take-up rates of 35 per cent in the 1991/92 academic year, rising to 55 per cent in the 1994/95 academic year. The take-up rate in 1991/92 was some 36 per cent of the total available loan facility, very close to the Department’s revised planning assumption (paragraphs 3.17 to 3.19).

13 As a matter of deliberate policy, neither the Government nor the Company seeks to encourage students to take out loans. It is for eligible students to decide whether to take out a loan. But the Company and the Government do seek to ensure that students have access to clear, full and accurate information about the scheme. The Company undertook a publicity campaign, with that specific objective, at the start of the scheme. The cost to the Company was nearly El million (including VAT) (paragraphs 3.21 to 3.23).

14 The Company commissioned an evaluation of the effectiveness of the publicity campaign. This suggested that, although there was advantage in providing students with accurate and comprehensive information, it was not possible to be clear whether the campaign had itself increased the level of student awareness because there were other forms of publicity that had appeared during or around the period of the campaign (paragraph 3.24).

15 The unit cost to the Company per account managed in the first academic year of the scheme (1990/91) was some ,648 on the basis of a 28 per cent take-up rate, compared with E20-E27 estimated by the consultants in their 1989 feasibility report, on the basis of an 80 per cent take-up rate. The Company’s annual report for the academic year 1991/92 shows that

the unit cost fell to some E26 for that year on the basis of a 36 per cent take-up rate. The unit cost per account managed should fall further as the take-up of loans rises. In addition, the Company informed the National Audit Office that it had taken, or proposed to take, a number of measures designed to reduce as far as possible its expenditure and thus the unit cost per account managed [paragraphs 3.25 to 3.27).

General conclusions 16 The development and implementation of the Government policy for a loans scheme, including the establishment of an operational company to administer the scheme in this relatively short period of time, was a substantial achievement by the Student Loans Company and Departmental officials, in association with consultants and others. The Company was able to start administering the loans scheme by the

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Government’s deadline of autumn 1990. The Departments and the Company, along with Price Waterhouse, therefore achieved their prime objective. Although costs in certain specific areas were higher than originally estimated, total expenditure on start-up costs remained well within the range that the consultants had estimated. The computerised Central Loans System was ready in time to enable the Company to respond rapidly to the first applications from eligible students for loans in autumn 1990. The Company leased from the outset enough accommodation for its medium-term needs. One floor is still available for sub-letting, but none of the accommodation has remained entirely unused.

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1.1

1.2

Part 1: Introduction

Prior to the introduction of the student loans schema in September 1990, financial support to students in higher education included grants towards board and lodging, books and other maintenance expenses, collectively referred to as “maintenance”, and the payment of tuition fees. This support was administered solely by local education authorities in England and Wales, by the Scottish Education Department, now the Scottish Office Education Department in Scotland, and by the Education and Library Boards in Northern Ireland. It has been the policy of successive governments to maintain parity of treatment throughout the United Kingdom so far as the main features of the student support system are concerned. Thus, the corresponding arrangements for Scotland and Northern Ireland closely resembled those in England and Wales. In the academic year 1987/88, total expenditure on student maintenance in England and Wales was E829 million.

1.3

1.4

The 1988 White Paper “Top-up Loans for Students” (Cm 520) announced that the Government had decided to introduce new arrangements for helping students to meet their living costs. The purposes of the new arrangements were to:

. share the cost of student maintenance more equitably between students

themselves, their parents and the taxpayer;

. increase the resources available to students;

. reduce, over time, the contribution to students’ maintenance which was expected from parents, and direct public expenditure on grants;

. implement the Government’s decision to reduce the students’ dependency by removing them from the social security benefits system:

. increase economic awareness among students, and their self-reliance.

To achieve these aims the Government intended to top up students’ resources with a loan facility. The loan facility would be over and above their entitlement to any means-tested maintenance grant and any parental contribution. Over a period of time, the value of the loan facility would increase until it was approximately equal to the value of the grant and parental contribution taken together. Loans taken up would need to be repaid and outstanding loans would be revalued annually in line with the Retail Prices Index, so ensuring that borrowers repaid in real terms broadly the same amount as they had borrowed.

The Education (Students Loans) Act 1990, which received Royal Assent on 26 April 1990, empowered the Secretary of State to make arrangements for students in higher education to receive loans towards their maintenance. The first detailed regulations were provided in the Education (Student Loans] Regulations 1990, which were made on 11 July 1990 and came into force on 1 August 1990. They applied to students domiciled in England, Wales and Scotland. Corresponding arrangements were made for students domiciled in Northern Ireland, through the Education (Student Loans) (Northern Ireland) Order 1990 and the Education (Student Loans) Regulations (Northern Ireland) 1990. In brief, the key features of the scheme are:

. courses that are eligible for loans are normally full-time courses of higher education below postgraduate level which last at least one academic year. Full-time and designated part-time courses of initial teacher training are also eligible for loans;

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. students are personally eligible if they are aged under 50 at the start of the course and were ordinarily resident in the British Isles for the three years preceding the start of the course. Certain students -for example, refugees and asylees -need not satisfy the ordinary residence requirement;

. loans are not means-tested and students applying for them are not credit-rated in any way;

. the value of the loan facilities in the academic year 1990/91 was between f240 and f460. The estimated average loan facility for planning purposes was some f391. The actual average loan was some f388. The value of the loan facilities in the academic year 1991/92 increased to between f335 and f660. The estimated average loan facility for planning purposes was some f543:

. loans bear interest each academic year at an annual rate equal to the percentage increase in the Retail Prices Index over the year to the previous June;

. borrowers normally start repayments in the April after they complete-or otherwise cease to attend-the course to which the loan relates. Borrowers currently repay over either five or seven years, depending on the number of academic years in respect of which they borrowed. Borrowers may repay their loans early if they wish;

. borrowers may defer repayment if their gross income is equal to or less than a prescribed threshold, set annually at 85 per cent of national average earnings. This meant that deferment was available for those with a gross monthly income of f965 or less in the academic year 1990/91, and fl,o55 or less in the academic year 1991/92; the threshold for the academic year 1992/93 is fl,130;

. outstanding loans are cancelled in certain circumstances.

1.5

1.6

1.7

To ensure that eligible students could apply for and receive top-up loans by September 1990, the Government set in hand arrangements to identify a cost-effective scheme for making loans and collecting repayments. This eventually took the form of a company, Student Loans Company Limited, which was established and owned initially by ten banks. Of the education departments, the Department of Education and Science, now the Department for Education (the Department), played the most prominent role during the development of the loans scheme and the establishment of the Student Loans Company, and funded the associated costs. The Scottish Office Education Department and the Department of Education for Northern Ireland were also involved, to varying degrees (collectively, this Report refers to the three Education Departments as “the Departments”). The Company’s Board and newly appointed senior management played the key role in ensuring that the Company was able to start administering the scheme by the Government’s deadline.

In December 1989, the Secretary of State for Scotland became the joint owner of the Student Loans Company together with the Secretary of State for Education and Science (now the Secretary of State for Education). Both are represented on the Board of the Student Loans Company. When the Student Loans Company opened for business in September 1990, the Department of Education for Northern Ireland and the Secretary of State for Scotland also became responsible, together with the Secretary of State for Education and Science, for making available public funds to the Company. The Welsh Office’s role was limited to participation in inter-departmental discussions on student awards policy leading to the Ministers’ decision to introduce a loans scheme; the Welsh Office are not involved in the administration of the policy or the operations or oversight of the Student Loans Company.

Price Waterhouse, acting as management consultants, also had a crucial role to play in the development of what became the Student Loans Company. They undertook

7


1.8

1.9

an initial feasibility study in spring 1989; were involved during the summer and autumn of 1989 in preparatory work for the establishment of the Company: and participated in preparatory work until the Company opened for business in September 1990. As the Company’s newly appointed managers took up their responsibilities, the number of Price Waterhouse staff working for the Company fell progressively. The main events during this period are shown in Figure 1.

At the beginning of January 1990, the Student Loans Company had a Board of Directors, no employees and was negotiating for the lease on a shell of an office in Glasgow. By September 1990 it had over 100 trained staff, fully equipped offices, a computer system for handling student loans, and other facilities. The Company was ready to process applications for loans on 10 September 1990. This met the Government’s target of introducing the scheme by autumn 1990 and exceeded the Company’s own target of 1 October 1990.

The establishment of an operational company to execute Government policy in this relatively short period of time was a

substantial professional, technical and administrative achievement by all concerned. Against this background, where start-up and administration costs [excluding VAT) and loans to students totalled E55 million between May 1989 and 31 March 1991, and some f139 million between I April 1991 and 31 March 1992, the National Audit Office examined the arrangements made by the Departments and the Student Loans Company for securing economy and efficiency in the setting up and operation of the Company; and the controls established by the Company to safeguard public funds.

1.10 The National Audit Office’s examination included: visits, with the internal audit department of the Student Loans Company, to ten higher education institutions (Annex A); independent verifications of loan records from students who had been certified as eligible for a loan; and discussions with the Committee of Vice-Chancellors and Principals of the Universities of the United Kingdom, the Conference of Registrars and Secretaries, the Committee of Directors of Polytechnics and the Standing Conference of Principals. The National Audit Office acknowledge the willing assistance provided by all concerned.

Fiaure 1: Student Loans-main events from November 1988 to September 1990 Date

Nowllber 1988

May 1999

November 1989

Event

l White Paper published, proposing a top-up loan facility for students.

l Management Consultants Price Waterhouse is?@ report on the feasibility of a “single vehicle” -to be owned and operated by financial inslilulions-for the administraiion of the proposed loans scheme.

0 Agreement reached between Government and ten major banks on Ihe adminislralion of the scheme and for the formation of

oecrnlber ,989

January 1990

April 1990

June 1990

July 1990

August 1990

September 1990

Student Loans Company Limited, in the first instance, 10 carry out preparatory work.

. Contract signed by the Student Loans Company with Electronic Data Syrtems Limited for the central loam processing system. @ Government acquires ownership of the Student Loans Company on the banks’ withdrawal from the loans scheme.

e Managing Director of the Student Loans Company appointed as the first full-time member of staff

# Student Loans Company acquires lease on premises for its oftice in Glasgow.

l The Education (Student Loans) Act 1990 received Royal Assent.

l The Departments publish booklets giving information for students and prospective students about the scheme.

l The Student Loans Company holds a series of regional seminars for administrators from the higher education institutions.

l The Education (Student Loans) (Northern Ireland) Order 1990 made.

l Approval by Parliament 01 the Student Loans Regulations for England, Wales and Scotland.

l Approval by Parliament 01 the Student Loans Regulations for Northern Ireland

l The Student Loans Company undertakes a campaign lo inform students, prospective students and others about the scheme.

l Student loans available for the 199081 academic year, with the Student Loans Company ready lo process loan applications.


1.11 The National Audit Office also took into 1.12 This Report is based on information and account the work that had been undertaken into the Student Loans

developments relating to the period up to

Company’s financial controls, by both the 31 March 1992, updated where appropriate to take account of a National Audit Office

Company’s internal audit department and its external auditors, KPMG Peat Marwick.

visit to the Student Loans Company in October 199z.

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2.1

2.2

2.3

Part 2: Establishment of the Student Loans Company

This part describes the involvement of financial institutions in the early stage of the development of a “single vehicle”, Student Loans Company Limited, for the administration of the proposed loans scheme. It also focuses upon the key role of management consultants, Price Waterhouse, in the initial feasibility study, during the subsequent establishment of Student Loans Company Limited, and in the period through to the Company’s opening for business. 2.4

Role of the financial institutions

The Government’s objective was to identify a cost-effective scheme which the financial institutions would administer. Accordingly, in late 1988, after the issue of the White Paper, the Department set up a Working Group on the Administration of Student Loans, comprising officials of the Department and representatives of the financial institutions, to consider how the scheme should be administered and to establish the basis for negotiation with the individual financial institutions. In January 1989, the Committee of London and Scottish Bankers (the Committee), a permanent, representative association of the Clearing Banks, now subsumed into the British Bankers Association, formally proposed that a “single vehicle” (subsequently Student Loans Company Limited) should be set up to operate the scheme on behalf of the Government and those financial institutions wishing to participate.

2.5

In March 1989, the Committee set up a working group to oversee the early development of the student loans scheme. The working group later became known as the “Financial Institutions’ Steering Committee on Student Loans” (abbreviated to FISCOS). The Department were obviously not a member of the

Committee of London and Scottish Bankers; nor could they be a member of FISCOS, because they were in a contractual relationship with both bodies and were negotiating with the financial institutions a fee for the administration of the loans scheme. The Department’s officials were, however, invited to attend meetings of FISCOS for some items of business.

The Department recognised that management of the project from the original concept through to the operation of a company would involve difficult judgements and decisions on procedures and costs, if timely completion in accordance with Government plans and consistency with economy in, and accountability for, public expenditure were to be achieved. Therefore, on 10 March 1989, the Secretary of State agreed that discussions should be held between officials and the Committee to negotiate a fee for the administration of the scheme. During the course of those discussions the Committee decided to commission a consultancy to test the feasibility and cost-effectiveness of the Committee’s proposal of a “single vehicle” for administering the scheme.

Following competitive tendering, the Committee commissioned Price Waterhouse to undertake a feasibility study of the project. The Department and the Committee subsequently commissioned Price Waterhouse, without further competition, to undertake all the further project management tasks

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2.6

2.7

necessary to develop the “single vehicle” concept into an operational company. The work was in three stages:

Stage

2April-May 1989)

fhiy-Nmlber 1993)

Service provided Consultancy fees estimates

(FOOOS -see Figure 2)

Feasibility including 23 cats of establishing company and timetable for implementation. Project definition, 419 including planning for (maximum) and management of a loans scheme.

;october 19s9- September 1990)

Continued project management. hand over to Student Loans Company management and assistance in planning through to implementation.

2,178 (maximum)

The Committee sent a copy of the feasibility study to the Department on 24 May 1989. The Secretary of State told the House on 19 June 1989, that the loans scheme would be best administered by financial institutions, subject to Parliamentary approval of the necessary legislation: that the scheme would be introduced in September 1990; that the Government would meet from June 1989 the costs of detailed preparatory work incurred by the Committee and by the future loans administration company: and that the feasibility study had indicated that the range of costs was from E8.3 million to E11.5 million for start-up costs-including consultancy fees for project management (see paragraph 2.5)-and from E10.4 million to f14 million a year for operating costs.

In July 1989, the Government forecast annual operating costs of between f 10 million and $20 million in the early years of the scheme. Estimates of the operating costs were inevitably approximate because, at that time, many aspects of the loans scheme had yet to be finalised. For example, they excluded costs which were eventually incurred on marketing and publicity, and on administration fees to be paid to the higher education institutions; but they included the cost of processing

2.8

2.9

loan applications by the banks’ branches which, with the banks’ subsequent withdrawal from the scheme (paragraph 2.9), did not materialise.

In November 1989, the Government announced that agreement had been reached with the Committee that ten banks would establish a company to undertake preparatory work on the student loans scheme: that the Government had agreed to fund the costs of the preparatory work which the company undertook; and that, in the first academic year of the scheme’s operation, participating financial institutions would receive a %? transaction fee for their work in processing each student loan application at their branches. Subsequently, the ten banks each bought one share in a shell company previously incorporated in July 1989 with an authorised share capital of 100 one pound shares. The company was established as “Student Loans Company Limited” on 20 November 1989. On 7 December 1989, the Department placed a contract (the Miscellaneous Expenditure Contract) with the Student Loans Company for preparatory work which the Company was to undertake on the scheme.

However, on 20 December 1989, the Secretary of State informed the House that, in view of the decision of Lloyds Bank in particular not to participate in the scheme, the Chairman of the Committee of London and Scottish Bankers had informed him earlier that day of the decision of five of the banks to withdraw; that, in the circumstances, the four Irish banks also wished to withdraw; that arrangements would be made for the Student Loans Company to pass into the ownership of the Government; that the Government had spent just under El million on preparations for the loans scheme, chiefly in the form of consultancy and legal fees: and that the banks had agreed to contribute EO.5 million to these preparatory costs.

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2.10

2.11

Appointment of Price Waterhouse as Project Managers

The National Audit Office examined the circumstances in which the Committee awarded Price Waterhouse a consultancy, without further competition, for follow-up second and third stage work up to implementation of the loans scheme (paragraph 2.5). Figure 2 provides details of each phase of the commissioned work.

relevant experience who might be invited to tender. As the proposal for the administration of the loans scheme was the responsibility of the Committee, it was for them to commission the consultancy. They invited tenders from only two firms. The Committee were under no obligation to consult the Department about that decision, nor could the Department seek to influence it. Following presentations by each firm, in April 1989, the Committee commissioned Price Waterhouse to

July i989- November 1999

398-419

OClOtw 198% September 1990

Z/XC-2,178

In March and April 1989, the Committee discussed with the Department their terms of reference for a consultancy (paragraph

undertake the feasibility study at a cost of E23,OOO (including VAT]. In order to meet the Government’s target of implementing

2.4). The Department obtained from the the scheme in autumn 1990, the study was

Treasury a list of seven firms with to be completed in three weeks.

Figure 2: Services provided by Management Consultants Price Waterhouse Penad April 19s9- May 1999

Estimate

23

WQO Payment

23

Service provided

Stage 1 (feasibility study):

assess the feasibility of using a single vehicle to operate the scheme; subsequently Student Loans Company Limited;

determine the timetable for implementation;

recommend a strucIure for the vehicle;

make recommendations on ownership and management:

consider and cost the options for information systems support:

assess the costs of establishing and operating the vehicle and make recommendations about kmding 01 those costs;

propose an incentive scheme for repayment of loans by students.

420 Stage 2 (project definition):

project planning and management of the loans scheme to be operated by the Student Loans Company:

defining the nature of the company to administer the scheme:

finding a location for the Student Loans Company;

selecting a supplier for the central loans system:

initiating the recruitment of key personnel:

revising the cost estimates for star&up and operation;

drawing up an implementation plan for Stage 3 of the project.

2,606 Stage 3 (implementation): continued project planning and management;

setting up the Student Loans Company including taxation and security advice;

leasing and fitting out premises:

recruitment and training of certain Student Loans Company stall for user XX~pta”C~ tSti”Q: establishing the operational infrastmclure: including operational procedures and communication systems;

acceptance and integration testing of central loans processing systems:

general wistance and cc-ordination, including handover to Student Loans Company’s management.

TOtal 2,620 (rnex, 3.049

Noie: Eslimafe includes a// lormal slaff time and cost quotatbx pmvided in advance by fhe consultanb as well 8s provision for incidenlals and VAT

Figure 2 shows the services provided and cost (including VAT) of employing Price Waterhouse from the feasibiliiy stage to the implementation of the loans scheme (see paragraph 2.10).

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2.12 After considering the Government’s timetable for the introduction of the loans scheme and the timetable set out in the feasibility study for the preparatory work, the Committee were concerned not to place in jeopardy the target date for an operational loans administration company. In particular, the key conclusion of the feasibility study report was that it would be possible to introduce the scheme in September 1990, as required by Government, provided that the timetable set out in the report was adhered to and that certain other conditions were met. One of the deadlines was that agreement for consultants to proceed to the further stages of implementation would be given in May 1989.

2.13 On 28 June 1989, the Committee made representations to the Secretary of State concerning the narrowness of the critical path that would have to be followed if a properly tested top-up loans scheme were to be delivered on time. In the light of the tight timetable, they judged it right to seek the Secretary of State’s approval for their intention to employ Price Waterhouse, without further competition, to undertake the project planning and definition work. Such approval was given on 30 June 1989. The assignment included finding premises for the proposed company, and other work defined in the feasibility study as Stage 2 and the first part of Stage 3 work (Figure 2). In the event, the timetable was adhered to in all material respects and the project was completed just within the prescribed timescale (paragraph 1.8).

Control over fees and other costs

2.14 After the initial feasibility study, the Government agreed that, in return for a commitment on the part of financial institutions to prepare a scheme for administering top-up loans on the basis set out in the White Paper and in the report on the feasibility study, the Department would meet all reasonable costs, including consultancy fee payments made to Price Waterhouse. Following formation of the Company, subsequent preparatory

expenditure was funded through the Miscellaneous Expenditure Contract (paragraph 2.8). Where appropriate, equipment and services were to be secured by the Committee and the Company on the basis of competitive tenders. Fee estimates by Price Waterhouse for the various stages of the consultancy work were to be prepared on the basis of man days at agreed daily rates.

2.15 Thus as a basic financial control, the Department ensured that the consultants’ terms of reference, estimated cost ceilings and fee rates by grade of staff were agreed in writing. Invoices were required to specify time spent by grade of staff and tasks undertaken. Obligations were not to be entered into on the Department’s behalf by Price Waterhouse or the Committee without the Department’s written agreement. The controls continued to apply when the Student Loans Company was brought under the Government’s ownership (paragraph 2.9). At that time, officials of the Department became the sole Directors of the Company. An official of the then Scottish Education Department became a Director in the following month.

Audit examination

2.16 Invoices for expenditure on the scheme, including those for fees and expenses incurred by Price Waterhouse, were initially reviewed and approved by the Committee and later by the Student Loans Company. The Committee and the Student Loans Company were also responsible for checking and paying the invoices. In the case of the Committee, the general arrangements were as set out in paragraph 2.14 above. Where the Committee’s costs were properly incurred and approved, the Department reimbursed them. Following the signing of the Miscellaneous Expenditure Contract in December 1989 (paragraph 2.8), the Department paid grant to the Company on the basis of the Company’s forecast of expenditure. It was then for the Company to pay its suppliers. Until May 1990, the role of paying suppliers was carried out by those officers or Directors of the Student Loans Company who were also officials of the

13


Department. The Department took special care to ensure that no conflict of interest arose.

2.17 More generally, the Department and the Scottish Office Education Department exercised oversight over payments made by the Student Loans Company through their representatives on the Board and through a Department of Education and Science Steering Committee (The Steering Committee), set up following the acquisition of the Company by the Government. The Steering Committee consisted of officials from the Department and from the Scottish Office Education Department, the Student Loans Company’s management and Price Waterhouse. The Company’s legal advisers also attended, as did representatives of Electronic Data Systems Limited for business which concerned the main computer system. They were chaired by the then Chairman of the Student Loans Company, a senior Department official. The Steering Committee met frequently from January to July 1990 in discharging their responsibility for overseeing the development of the scheme during that period.

2.16 Given the complex and varied arrangements that existed for the payment and reimbursement of expenditure incurred on the scheme, the National Audit Office undertook detailed and comprehensive test reconciliations of costs incurred against agreed estimates. The National Audit Office noted that, where appropriate, the Department, and later the Student Loans Company, obtained

additional information from Price Waterhouse on fee estimates, expense claims, time sheets and work undertaken, before authorising payment of invoices. Issues arising from the audit scrutiny included:

(i) reasons for the increase in costs on Stage 3 of the consultancy (paragraphs 2.19 to 2.21);

(ii) costs of the Student Loans Company’s premises in Glasgow (paragraphs 2.22 to 2.27);

(iii) consequences of an amendment to the specification for the central loans system (paragraphs 2.28 to 2.30);

(iv) the tender evaluation, selection and subsequent negotiations for the computer system (paragraphs 2.31 to 2.35);

[v) the control over requests for changes in the computer systems (paragraphs 2.36 to 2.42).

Increased costs: Stage 3

2.19 Over the three Stages of the consultancy (Figure 2), fees paid [including VAT) of E3.949 million exceeded the original maximum estimates of f2.620 million by 16.4 per cent. In the case of Stage 3 the fees paid (including VAT) amounted to E2.606 million, an increase of E428.000 (19.7 per cent) over the maximum estimate of fZ2.178 million. The National Audit Office sought explanations for this increase (Figure 3).

Figure 3: Management consultants’ fee estimates for Stage 3 Estimate dated Far period um

10 October 1969 October 1989 to January 1990 WI - 1.046 Imax)

22 Februar, 19% February 19% to May 19% 791 15 March 1990 February 1990 to June 1990 221 11 May 1990 May 1990 to June 19% 16 16 June 1990 June 1990 to September 1990 102

1,130

Total 01 estimates 2,178 (max) Outturn cost (see Figure 2) 2.606 Cost in excess of estimates 428

Figure 3 shows the extent by which the outturn cw,t for Stage 3 exceeded the total of formal fee estimates provided by Price Waterhouse, including incidentals and VAT.

14


2.20 The National Audit Office found that this additional expenditure was in respect of properly authorised work, which included the following tasks not covered by the original estimate:

a work plan agreed by the Company for computer systems testing. This increased the final estimate of 18 June 1990 of E102,OOO (Figure 3) by a further X84,000 (excluding incidentals and VAT);

extra work for the Company relating to staff recruitment and training for computer systems testing:

additional computer specification and testing work relating to changes occasioned during the passage through Parliament of the primary legislation governing the loans scheme:

work on the preparation of a briefing programme for administrators from the higher education institutions;

further assistance by the consultants necessary to shadow newly recruited senior personnel of the Student Loans Company in the early days of their appointment.

The Student Loans Company had asked that the consultants should provide the further work and assistance on a ‘time and materials’ basis at their agreed daily fee rates, in accordance with work plans or otherwise agreed additional assistance. The Company considered that, in terms of value for money, this additional expenditure of E428,OOO was justified.

2.21 The Student Loans Company informed the National Audit Office that, to save costs, it had undertaken certain tasks itself instead of commissioning further work by the consultants. Such tasks included work on the financial systems and operations, and assistance with acceptance testing of the central loans system. The Department told the National Audit Office that, in spring 1990, the consultants’ management role in the development, implementation and operation of the newly formed Student Loans Company was steadily running down and that the consultants were, quite

naturally, seeking to ensure, as part of their consultancy, that the Company’s management could assume responsibility.

Cost of premises in Glasgow

2.22 Under Stages 2 and 3 of the consultancy, the consultants were required by the Committee, with the agreement of the Government, to locate and negotiate the terms of a contract for suitable leasehold premises for the Student Loans Company. The premises would have to be sufficiently large to meet not only the Company’s immediate requirements, but also its needs for the next five years. The Company knew that its need for accommodation would grow, because it would take on more staff as the number of borrowers repaying their loans grew. In October 1989, the consultants recommended to the Committee that the Company should be located in Glasgow and, by early November, they had identified three suitable premises. Their subsequent negotiations with landlords to secure a lease for one were difficult and prolonged. In late November 1989, the landlords of the cheapest of the three premises rejected an offer from the Student Loans Company. The Department understood that the landlord had withdrawn because of the public controversy prevailing at that time over student loans policy.

2.23 The Company then considered whether to accept the lease for the cheaper of the two remaining premises -five floors of office accommodation at 100 Bothwell Street, Glasgow. These premises were not only cheaper than the other accommodation, they were also newly completed and ready for fitting out -an important consideration in view of the tight timetable.

2.24 At that time there was buoyant demand for good quality city centre premises in Glasgow, and it was public knowledge that the Student Loans Company needed to secure premises with all speed. The Student Loans Company, its consultants and the Department all recognised that the terms of the lease were weighted to the landlord’s advantage. For example, under them the Student Loans Company is liable

15


for the repair of any latent and inherent defects in the building. In addition, the terms governing the rent review process were favourable to the landlord. However, the terms were broadly similar to those of the other tenant of 100 Bothwell Street and are not uncommon in leases in Scotland.

2.25 If the Student Loans Company had decided on commercial grounds not to take up this lease but to continue to look for other premises, the introduction of the loans scheme would have been delayed beyond the target implementation date set by Ministers (paragraph 2.12). The Steering Committee (paragraph 2.17) considered the terms of the lease and took legal and other professional advice. On the Steering Committee’s recommendation, the Secretary of State authorised the Directors of the Student Loans Company to accept the lease offered. The Secretary of State also agreed to guarantee the lease while the Company occupied the set of premises, and he informed Parliament of this contingent liability. Following tough bargaining, the premises were secured on a rent-free basis until May 1990, and ~100,000 was provided by the landlord towards fitting-out costs. In the circumstances, both the Student Loans Company and the landlord were satisfied with the outcome.

2.26 The leased accommodation of five floors had a floor area greater than the immediate requirements of the Student Loans Company, for the reasons given in paragraph 2.22. Therefore, shortly after acquiring the premises in January 1990, for an annual rental of Z920,000, the Company sought to sub-let the marketable ground floor area of 10,800 square feet. Subsequently, pending increases in take-up of loans by students, the Company sought to sub-let a further floor of the building, comprising 12,115 square feet. On a pro rata basis to the overall area of the premises, the National Audit Office calculated the annual rental of the surplus accommodation to be of the order of E356,OOO.

2.27 No tenants were found for either of the available floors. Possible reasons were the decline in the property market and the fact that any sub-lease would be for a short term only. The accommodation may also have been unattractive to potential lessees because of the student protests that had taken place in the vicinity of the Company’s offices and the potential for further such protests. In the meantime, the Student Loans Company used some of this surplus space for storing stationery and documentation, leading to savings of costs that otherwise would have been incurred off-site. With the increase in the take-up of loans and the start of large numbers of repayments, one of the two surplus floors has been withdrawn from the market and is in continuous use. The annual rental in respect of surplus accommodation has thus been reduced to some El62,OOO. The Company expects to make full use in due course of all the remaining surplus accommodation.

Computer specification

2.28 Within the original Stage 2 fee estimate maximum of 2419,000 (Figure 2), the consultants gave an undertaking to the Committee to provide a detailed requirement definition of a computerised central loans system, an evaluation of tenders for the supply of this system, and a recommended solution with costs and timescales. The work was to be undertaken by a Price Waterhouse team experienced in systems development and was to be completed in three months and at a cost [including VAT but excluding incidentals) of between L1li’,OOO and El28,OOO. Price Waterhouse were assisted in their work by experts from the various banks forming FISCOS (paragraph 2.3). Ultimately, Electronic Data Systems Limited were chosen as a supplier by FISCOS, having demonstrated working systems which complied with the core components of the Government’s system requirements.

2.29 During an examination of the contract costs of the computer system that was subsequently installed, the National Audit Office noted that the Steering Committee (paragraph 2.17) had requested an

16


amendment to the computer specification at a cost of f92,OOO (including VAT). This amendment was made to enable the Company to calculate the amounts of borrowers’ monthly repayments of their loans in a more appropriate way. As the National Audit Office considered that the original specification should have required this method of calculation, they examined whether the Department had sought to recover the cost of making the amendment from the consultants.

2.30 The National Audit Office found that the minutes of the Steering Committee’s meeting of 28 February 1990 recorded that Price Waterhouse had identified the prospective problem and had accepted a large measure of responsibility for the need to make the amendment. They had relied in part on advice from a bank which, in retrospect, had been unhelpful. The Department did not take legal advice on the consultants’ potential liability and did not ask them to contribute to, or pay in full, the cost of the amendment.

Computer system selection

2.31 FISCOS was to review and approve the detailed requirement definition for the computerised central loans system provided by Price Waterhouse under Stage 2 (paragraph 2.28). FISCOS was also to review and approve tenders obtained and evaluated by Price Waterhouse for the computer system itself, its installation and its operation over a period of years. This system was at the heart of the student loans scheme. As envisaged in autumn 1989, it was to:

l process information given and requests made by students, colleges, the participating financial institutions and the Government;

. supply reports to borrowers, the financial institutions, the Government and the Student Loans Company;

. supply the required data for the Company’s accounting systems and for making payments to borrowers; and

l manage repayments and, eventually, record data on borrowers who had deferred or defaulted.

2.32 Following the decision of Price Waterhouse to withdraw from the evaluation procedure in order to submit a tender for the computer system, the Department took the prudent course of protecting public funds by appointing KPMG Peat Marwick-who also acted as advisers to the Department on aspects of Stage 2 work generally -to represent the Department on the FISCOS Tender Evaluation and Selection Panel (the Panel which sat from September to November 1989. As well as KPMG Peat Marwick, the

1)

Panel consisted of representatives from the Committee, Bankers’ Automated Clearing Services Limited and the Government’s Central Computer and Telecommunications Agency.

2.33 The Panel considered the financial, technical and contractual aspects of tenders received for the computer system, of which four were short-listed. The lowest tenderer was Electronic Data Systems Limited, a corporation experienced in operating student loans systems in the United States of America.

2.34 After entering negotiations, Electronic Data Systems Limited informed the Panel that their original tender had erroneously indicated that VAT was included in their tender price, and their quoted price was in fact exclusive of VAT. Adding VAT to the price increased the Electronic Data Systems Limited bid by some El.7 million (at the then rate of VAT). Nevertheless, that firm’s original bid was significantly cheaper than the next lowest bid, and the revised bid still remained significantly cheaper after negotiated price changes and the addition of VAT. The Panel was confident that Electronic Data Systems Limited was the only company that could perform the contract in time with the appropriate experience and management strength.

2.35 The Panel and the Department took considerable care to develop a negotiating position that enabled the Panel to respond to this proposed price increase. Ministers approved that negotiating position. Following further negotiations, Electronic Data Systems Limited offered a contract

17


discount equivalent to between 27 per cent and 50 per cent of the additional VAT charge, depending on the length of the contract period. The Student Loans Company eventually agreed to a five year five month contract, with a discount of EO.5 million; leaving an increase of El.2 million on the original tendered price. In December 1989, the Student Loans Company placed a contract with Electronic Data Systems Limited at an overall cost of about fl2 million (excluding VAT).

Computer system change requests

2.36 The Central Loans System was based on an existing computer system which was subsequently tailored to meet the Company’s specific needs. Further changes were occasioned during the development process to reflect changes in the planned operation of the scheme as the primary legislation passed through Parliament.

2.37 The National Audit Office noted the Panel’s view that Electronic Data Systems Limited had a tough commercial attitude to price and procedures. Hence vigorous project and contractual control would be needed to protect public funds, given that the computer system to be provided would inevitably require modifications as the scheme developed. The National Audit Office therefore examined the controls over requests for changes to the computer systems. Payments for such changes had totalled some E700,OOO (including VAT) by March 1991.

2.38 As required under Stage 3 of the consultancy arrangements, the day to day operations of the Student Loans Company had been managed by Price Waterhouse pending the recruitment of the Company’s own permanent staff. The National Audit Office noted that, in spring 1990, the newly appointed senior staff of the Company, as part of their management oversight of important areas, had focussed their attention upon the controls over requested changes in the computer system. In particular, they wished to ensure: the appropriateness or otherwise of the time and cost estimates of the changes made by Electronic Data Systems Limited; and that

modifications to the specification and the relevant quotations for the changes did not result in duplication of activity.

2.39 The Company’s enquiries revealed that Electronic Data Systems Limited had not always provided it with full particulars, a breakdown and a justification of the price for all system changes. These had a cumulative value of E555,000 (excluding VAT) by May 1990 (including the amendment referred to in paragraph 2.29). Electronic Data Systems Limited also charged out the work of all their staff at the same rate irrespective of experience. Thus, according to the report commissioned by management, there existed the possibilities that:

full value for money was not being obtained on large items of expenditure such as training of Student Loans Company staff on the computer systems, especially where these needed to be integrated closely with the Company’s project plans;

as Electronic Data Systems Limited were not always providing details of the level of experience of their staff used on the contract, inexperienced staff might be used. This could lead to higher estimates of the time required, and hence a higher quotation for the job. It would also increase the possibility of errors being found in the testing prior to the Student Loans Company’s acceptance of the computer systems;

the Student Loans Company did not always have adequate information to control its relationship with Electronic Data Systems Limited and, therefore, it might not be getting the best benefit from this relationship.

2.40 The Company told the National Audit Office that the work that Electronic Data Systems Limited did for the Company was more than competent, as the user acceptance testing had revealed. The systems were efficient and were working in good time for the start of operations. However, the report commissioned by the management helped the Company to secure additional benefits from its contract with Electronic Data Systems Limited.

18

THEADMINISTRATIONOFSTUDENTLOANS

2.41 The Student Loans Company told the National Audit Office that its first significant attempt, in April 1990, to review in detail charges proposed by Electronic Data Systems Limited for system changes resulted in a 50 per cent reduction in a quotation originally costed at fX40,OOO. The Student Loans Company also provided evidence of other useful but more modest reductions negotiated in priority change requests during 1990. These reductions totalled E9,OOO (or 113 per cent] on quotations of f49,OOO for 21 change requests (all amounts excluding VAT). The Company also told the National Audit Office that, by October 1990, it had reached the situation where its permanent staff understood the organisation and structure of the computer systems and were able to comment on the appropriateness and efficiency of change proposals made by Electronic Data

Systems Limited and/or by users of the system. As a result, the format of change requests was altered in October 1990, and procedures which linked together operational processes and computer changes were also revised to ensure an integrated approach to and control over change requests.

2.42 More generally, the Student Loans Company also confirmed its continuing commitment to reduce and control development costs of the computer system, for example, by establishing-for a fixed annual charge -a joint development team with Electronic Data Systems Limited. Furthermore, the Company was negotiating with Electronic Data Systems Limited the right to receive royalty payments for possible third party use of the computer system, including all modifications and future development.

THEADMINISTRATIONOFSTUDENTLOANS

3.1

3.2

3.3

3.4

Part 3: Financial control and performance

This part describes the funding of the loans scheme between September 1990 and 31 March 1992, and the start-up and operational costs of the Student Loans Company between 1 April 1990 and 31 March 1992. It describes the nature and results of an evaluation undertaken by the National Audit Office into the financial controls and procedures operated by the Student Loans Company and the Department in respect of the scheme. It also considers the Student Loans Company’s performance in the light of: the rate of take-up of loans, which was lower than the Departments had originally assumed for planning purposes; the value for money of the initial information provided by the Department and the Company for students and prospective students; and the Company’s unit cost per account managed.

During the first two financial years of the Student Loans Company’s operation, ending on 31 March 1992, the Company had made loans to students as follows:

Loans issued (E million)

Financial year ending 31 March 1991 39.1 (Winter/Spring terms 1990191) Financial year ending 31 March 1992 126.1 (Summer term 199891 and Winter/Spring terms 1991192) - Total 167,2

-

Over the corresponding period, the start-up and operational costs (excluding VAT) of the Company, as stated in its cashflow reports for the years ending 31 March 1991 and 1992, were as follows:

Administration costs

(E million) Financial year ending 31 March 1991 Financial year ending 31 March 1992

Total

Ii.6 to.5

22,i -

Total start-up costs of the loans scheme up to the commencement of the first academic year 1990/91 were E9.3 million,

3.5

3.6

of which Es.0 million were incurred in the financial year ending 31 March 1991. These include all preparatory costs (excluding VAT) on the scheme incurred by the Department and the Student Loans Company. Further start-up costs of f0.6 million were incurred by the Company in the second full financial year of operation-1991-92, in respect of establishing systems for the collection of loan repayments (Figures 4(a) and 4(b)).

The National Audit Office sought to evaluate the financial control systems installed by the Student Loans Company to safeguard the substantial public funds drawn down from the Departments to support its operations. Following discussions with the Student Loans Company’s external and internal auditors in early 1991, the National Audit Office undertook an evaluation of the adequacy of the financial control procedures, including the monitoring arrangements established by both the Company and the Departments to measure the Company’s performance. The National Audit Office also took into account a pre-implementation review and a security review of the computerised Central Loans System by KPMG Peat Marwick Management Consultants, and the subsequent follow-up action by the Company.

After the National Audit Office initial evaluation, the original Central Loans System (paragraph 2.31) was extensively restructured and enhanced in preparation for the start of repayments, in April 1992, by the first major group of borrowers to start repaying. Enhancements include the provision of software for recovering loans from defaulting borrowers. In October 1992, at the invitation of the Company, the National Audit Office evaluated both the revised system introduced in early 1992 for handling applications for deferment, and a possible revision to the application

20


Figure 4(a): Administration costs in the financial year 1990-91

Source: Student Loans Company cash report for tb8 year ending 31 March 1991. Note: Costs are on a cash basis and .%c,“de “AT,

Figure 4(a) shows the relative size of the various elements of the Student Loans Company administration expsnditure of f11.6 million for 1990-91 and the importance of start-up costs in the Company’s first full financial year of operation.

Figure 4(b): Administration costs in the financial year 1991-92

Start-up Costs in respect of the collection of repayments f0.6m

Capital Expenditure fl .Om

Source: Student Loans Company cash rsport for the year en&g 31 March 1992 Note: Costs a,0 0” a cash basis and exclude “AT,

Figure 4(b) shows the relative size of ths various elements of the Student Loans Company administration expenditure of f10.5 million for the financial year 1991-92. Included In general expenditure (f4Sm) are payments to Electronic Data Systems Ltd, totalling some f2 million, for operating the Computerised Central Loans System.

21

THE ADMlNlSTRATION OF STUDENT LOANS

3.7

3.8

3.9

process for existing borrowers. The National Audit Office plan to evaluate the systems for handling loan repayments, defaults and cancellations early in 1993.

Financial control

The National Audit Office’s first evaluation (paragraph 3.5) sought to identify possible risks to public funds, as regards both the processing of loans and the important accounting functions such as general ledger systems, payrolls, debtors, creditors, general cash handling and budgetary control. This involved identifying the key controls required to counter such risks. Audit tests on the application of the controls revealed that the systems performed adequately for a newly formed company. In many areas the National Audit Office’s tests uncovered no significant weaknesses. Reflecting the speed with which they had had to be developed and implemented, however, there were areas where controls needed to be strengthened; [Annex B).

The weaknesses identified fell mainly into the following categories:

infrequent and insufficient accounting and processing reconciliations, which meant that, were there any fraud, it might remain undetected;

incomplete financial manuals, which meant that procedures might not be properly followed: and

insufficient management review, which meant that expected control procedures might not be undertaken or completed to required standards.

As part of their audit tests, the National Audit Office verified the Student Loans Company’s computerised loan records, by requesting some 150 students to confirm details of any loan application that they had made. These students were selected on a random basis from among students who had been certified as eligible for a loan by February 1991. Eighty-one per cent of those approached responded. Apart from some minor discrepancies, such as changes in home address, the results

3.10

3.11

3.12

confirmed the accuracy and integrity of the computerised loan records, which are based upon the documents associated with the procedures for the payment of a loan (Figure 5).

The National Audit Office also reviewed, and judged satisfactory, the operation of the procedures prescribed under the terms of a Financial Memorandum between the Student Loans Company, the Secretaries of State for Education and Science and for Scotland and the Department of Education for Northern Ireland, under which the Government monitors and funds the activity of the Company (Annex C). There was evidence that the Department scrutinised monthly funding reports by the Student Loans Company to ensure an economic draw down of Government funds. The Department also questioned the economy of operational costs; they received a corporate plan from the Student Loans Company in accordance with the terms of its Financial Memorandum and they were keeping under review amounts required for loan take-up.

Following the evaluation in 1991 (paragraph 3.7), the National Audit Office gave the Company a detailed account of their findings and recommendations for action. The Company have responded swiftly and appropriately in all significant cases, as shown in Annex B.

The October 1992 evaluation (paragraph 3.6) found that the Company had not completed the testing of the system for handling deferment applications before implementing it. As a result data were occasionally incorrectly processed and had to be amended manually. The Company was fully aware of the deficiency, had remedial action in hand and intended to perform a full re-test of the deferment system. The National Audit Office found no evidence that the Company incorrectly granted deferment to any borrowers who were not entitled to defer, and they were satisfied with the remedial action being taken. The possible revision to the application process for existing borrowers,

22


Figure 5: Student Loan payment procedures Student College SLC

The student asks his college to certify his

The student fills in the application form and

sends it to SLC

The college checks the student’s residence qualifications, course eligibility, age. bank or building society account details, date and place of birth and name at birth; if satisfied

The college sends a” eligibility certificate to SLC and hands an application form to the student

SLC matches the eligibility certificate and application

form and sends a loan agreement to the student

Source: Student Loans Company’s Report 1989-91.

Note: SLC - Sludent Loans Company

Figure 5 shows. in simplified form, the procedures foilowed for the payment of a student loan and the key documents involved.

SLC pays the loan to the student by direct credit to

his account

23


as outlined, was sound and the Company had made plans for all the key internal controls necessary for a secure operation.

3.13 The results of the National Audit Office’s evaluations (paragraphs 3.5 to 3.12) have proved useful to the external and internal auditors of the Student Loans Company.

Computer security

3.14 The National Audit Office’s visit to the Company in October 1992 provided an opportunity for them to take into account the findings of a separate study of computer security, which the Company had commissioned from KPMG Peat Marwick. This found that, for 70 per cent of the potential problem or risk areas, the control procedures were satisfactory in containing the exposure. Of the remaining potential problem or risk areas, 17 per cent were defined as “medium” risk and 13 per cent were defined as “high” risk. The consultants recognised that the Student Loans Company was relatively new and that the development and establishment of adequate control and security procedures took time: but recommended that additional or alternative control procedures should be introduced as soon as possible in order to contain the risks in the following key areas: l security management . access controls . systems development . communications.

3.15 The Company responded positively to KPMG Peat Marwick’s recommendations in those cases where it accepted them, by drawing up a prioritised action plan and setting in hand remedial action, which in some cases had been completed.

Measures of performance

3.16 The National Audit Office examined some of the statistical and other data by means of which both the Student Loans Company and the Departments monitor the Company’s performance.

Take-up of student loans

3.17 Paragraph 89 of the Government’s Expenditure Plans for the financial period 1991-92 to 1993-94 (Cm 1511, February 1991) noted that the Department’s expenditure plans for student loans were consistent with the latest projections of student numbers in higher education in Great Britain. They allowed for the continued development of the loans scheme. The provision for net loans (new loans less repayments) and administrative costs for England and Wales over the financial period 1990-91 to 1993-94 of f918 million was based on the planning assumption that 80 per cent of eligible students would take up the maximum loan facility each academic year. The Scottish Office Education Department and the Department of Education for Northern Ireland made commensurate provision in respect of eligible students from those countries. The Department told the National Audit Office that 80 per cent was a cautious planning hypothesis, not a prediction. It is important for the Departments to ensure that they, and in turn the Student Loans Company, have sufficient funds to meet the future demand for student loans. The Government have made clear that loans will be available for all eligible students, so actual expenditure on loans will be determined by demand.

3.18 The National Audit Office recognise that in this new area, accurate prediction is difficult to achieve and that there were a number of factors which may have tended to suppress demand for loans in the first year. For example: in 1990, high street banks began to make interest-free loans more widely available to students; in autumn 1990, the Government uprated the basic maintenance grant as well as the supplementary allowances payable with the grant; social security benefits were still available to full-time students generally during the summer vacation 1990; and students were naturally cautious about using a new scheme of student support.


3.19 In the light of actual take-up during the 1990/91 academic year of 28 per cent, the Government made the following assumptions for planning purposes of the rates of take-up of loans over the period covered by the 1991 Public Expenditure Survey:

Academic year Percentage take-up lYYl/YZ 35 1992/93 35 1993/94 45 1994/95 55

The Government’s Expenditure Plans for the financial period 1992-93 to 1994-95 (Cm 1911, February 1992) were based on these revised planning assumptions. The take-up rate in 1991/92 was some 36 per cent of the available loan facility.

3.20 Since these assumptions point to a gradual increase in the take-up of student loans over a period of years, the National Audit Office obtained confirmation that the Student Loans Company, and the Department, had established procedures to compare actual take-up with planning assumptions. The Company and the Department have analysed data on the pattern of loans which students had taken out in the academic year 1990/91 and 1991/92. In June 1992, the Department published a Statistical Bulletin containing detailed analysis of data relating to take-up of loans in the academic year 1990/91. This showed that:

the maximum amounts available through the basic mandatory grant and full-year loan were 24-25 per cent higher in cash terms (12 per cent higher in real terms) than the comparable grant rates for 1969/90;

full-year student loans accounted for between 14 and 16 per cent of the total resource available to mandatory grant holders;

some 160,000 students received a loan, representing about 2.6 per cent of those estimated to be eligible for a loan. Total loan payments amounted to E69.9 million;

the average value of loan issued was E366.

3.21

3.22

3.23

Publicity

As a matter of deliberate policy, neither the Government nor the Company seeks to encourage students to take out loans. It is for eligible students to decide whether to take out a loan. But the Company and the Government do seek to ensure that students have access to clear, full and accurate information about the scheme. Thus, in order to inform the maximum number of potential borrowers and others who might be interested, the Departments issued a number of explanatory leaflets and booklets. The Student Loans Company also issued an explanatory leaflet and, in September 1990, placed paid advertisements in the press and elsewhere. The total cost of all publications and media coverage up to September/October 1990 was some EI million, as set out in Table 1.

Table 1 shows that, when loans first became available to students, the Company spent f966,000, including VAT, on providing information for students about the loans scheme. This included some ~121,000, being the cost of producing over 1.7 million copies of a second edition of the booklet “Student Loans - Are you in the Picture?“. These were required to correct errors made by the Student Loans Company in the loan repayment examples given in the original leaflet, of which 2.3 million copies were produced at a total cost of E167,OOO. Since 1990, the Company’s expenditure on providing information has been much lower, because students and prospective students are now more familiar with the scheme.

The Departments and the Student Loans Company had known before the Company’s campaign started that there would be other forms of publicity appearing during or around the period of the campaign. But most of this other publicity was beyond the control of the Departments and the Company and might be hostile or factually inaccurate. The Departments and the Company therefore had a duty to produce their own information material, in order to ensure that students and prospective students had access to clear, accurate and impartial

25


information about the loans scheme, so that they could then decide for themselves whether to take out a loan. The material reflected the different responsibilities of the Departments and the Company. The Company’s information campaign emphasised the application process, as the Company was responsible for administering the scheme. The Departments’ material provided more comprehensive guides to the schema and formed a companion to their established arrangements for providing information about student awards.

3.24 The National Audit Office sought evidence to establish whether the publicity campaign by the Student Loans Company had helped to increase awareness amongst students of the loans scheme. The National Audit Office found that the Student Loans Company had commissioned its publicity agents, Baillie Marshall Advertising, to undertake an evaluation of the effectiveness of the

3.25

media campaign of September 1990. In an April 1991 progress report to the Secretary of State, the Department noted that the evidence remained inconclusive. The campaign was cost-effective and sensibly managed, and at the end of it students were reasonably well informed about the scheme. But, because students had been receiving information from various sources. the Company could not be clear whether it was its campaign that had helped to inform the students.

Operational costs

An important indicator of the economic and efficient operation of the Student Loans Company is the level of the unit cost of each loan account managed. The Government had originally estimated in July 1989 that, based on the feasibility report by Price Waterhouse (paragraph 2.5), the unit cost in the 1990/91 academic year would be between fI20 and f27. However, this estimate was based on a

Table 1: Student loans scheme publicity Origin Date BO&,~“L~~fl~t

iAdvertising Number Of copies printed

Distributed io Cost (including VAT) E

Departments excluding DENI February 1990 “Topap loans for Students-the Government‘s proposals”

Departments excluding DENI May 1990 “The Student Topup Loans Scheme-An Outline”

DEN, July 1390 “The Student Top-up Loans Scheme-An Outline”

Departments excluding DENI

DENI

August 1990 “Loans for Students-a brief guide”

September 1990 “Loans for Students-a brief guide”

Student Loam campany September mu “Student Loans-Are you in the Umited Picture?

Student Loans Company Limited

September 13% Media coverage

2w.000

685.cc0

25,ow

Over 2 million (see paragraph 3.222)

N/A

Local Education Authorities, Members of Parliament and interested individuals

Schools, colleges, careers centres, academic institutions and in response to demand

Education and Library Boards, academic institutions and other interested parties

HEIS, Local Authorities, Schools and Colleges

Higher education students, Members of Parliament. academic institutions and other interested parties

HEIS and Students. Potential Students and their Parents

Primary focus: All higher education students aged 17-21, potential higher education students and their parents. Secondary focus: Mature students aged 22-50

9,0w

6.220

i,4w

58,500

2,900

2@8,wo

EsQ,ccQ

1.046.oco

MM: DEM = Depwtmenf of Education for Notihern Ireland HEls = HiQher Educafjm lnslitutions Cost includes distdbuiim as well as pdntinQ.

Table 1 provides a chronology nd the associated cost of the main elements of the Departments’ and the Student Loans Company’s publicity for the student loans scheme.

26


planning hypothesis that 80 per cent (427,600) of the then forecast number of eligible students would take out a loan in the academic year 1990/91. It excluded some important areas of expenditure, such as debt collection costs, marketing and publicity costs and the administration costs of higher education institutions. But it included the cost to bank branches of processing loan applications which, in the event, was not incurred. The Student Loans Company’s first Annual Report included a measure of unit costs. This was the Company’s cash expenditure for the period 1 September 1990 to 31 August 1991, excluding VAT and capital and non-recurring development costs, divided by the number of loan accounts managed in that year.

3.26 On this definition: l during the academic year 1990/91, the

cumulative average unit cost decreased from ?Z60 at 31 January 1991 to ?Z48 at 31 August 1991;

. the corresponding average unit cost for the academic year 1991/92 was some f28.

3.27 The Student Loans Company told the National Audit Office, in response to their initial evaluation in 1991 (paragraph 3.51, that it had taken, or planned to take, steps to reduce as far as possible the unit cost per account managed. These included:

.

efforts to sub-lease the surplus accommodation [paragraphs 2.26 to 2.27):

strict control over the number and cost of changes to the computer system, including the establishment of a joint development team with Electronic Data Systems Limited for a fixed annual charge (paragraphs 2.40 to 2.42);

the recruitment of fewer staff than planned, at a saving of ~0.7 million;

reducing the processing time for loan applications, for example, through measures taken to eliminate, as far as possible, incorrectly completed application forms and eligibility certificates, and improved feedback procedures to higher education institutions. As a result, by the end of the financial year 1990-91, 86.1 per cent of loans were paid within the Company’s target of 21 days from receipt of loan application, after discounting any time beyond two days for the student to return the signed loan agreement;

consideration of whether it could save money, or derive other efficiency benefits, by undertaking services, such as microfilming, data processing or printing, in-house rather than contracting them to third parties.

27


Annex A Higher Education Institutions visited by the Najional Audit Office

The following higher education institutions were visited by the National Audit Office with the Students Loans Company’s internal audit department during March-April 1991:

Hertford College, Oxford

Westminster College, Oxford

Durham University

Hull University

City of London Polytechnic

Oxford Polytechnic

Homerton College, Cambridge

St David’s University College, Lampeter

Jordanhill College of Education, Glasgow

Scottish College of Textiles, Galashiels

28


Annex B Financial control of the Student Loans Company

This annex details the NAO’s evaluation of risks and corresponding key controls, control weaknesses, recommendations and the management’s response, after a detailed review of the Student Loans Company’s Loans and Financial systems, including related external controls operated by the Department and the higher education institutions.

Key controls are those which the National Audit Office would expect to find operating. Some of them satisfy more than one financial control objective. In general. the key controls have been established and were operating satisfactorily; although audit tests revealed a number of control weaknesses. These are set out below, with corresponding recommendations and management response from the Student Loans Company, including action taken up to 30 September 1992. Although no significant weaknesses were found against some of the control objectives, it is in the nature of this type of examination that the auditor can never be entirely sure that the systems of control always function properly.

Possible risks to financial contml

Key controls Conlrol weaknesses Recommendations Management response from Company, including action taken up to 30 September 109,

Control objective: Completeness Risks could include:

(a) On Loans

Incomplete processing and recording of loan documentation. Failure to process and record loan payments and loan repaymentr. Failure to identity all loan payments due.

Within the Student Loans Company

Recording and batching of documents when first received and manual contml totals for wonciliation to data input.

Matching of application and eligibility documents.

Reconciliation of loan processing reports and contml accounts within the computerised Central Loans System.

Update of borrower details before the start of repayment.

Regular reconciliations between loan and financial records, reviewed by management.

Lack of control over completeness of batch processing.

No significant weaknesses found,


Failure to perform reconciliations Perfcn reconciliations between the loans and financial between loans and financial records with suficient frequency, records more frequently. and insufficient evidence of Ensure greater. evidenced, management supervision and management review of this review of this task. task.

Procedures do not ensure completeness of the micrafilm record of loan documentation or the retention of reports.

Complete batch contml document log.

NOW

None.

All loan documentation should be microfilmed and reports should be retained for audit purposes.

The Company now completes a batch control document log. Hweer, the batch control document number is not intondcd as 0 fitlO, storage reference: all computer files already point to the micm film reference.

Not applicable.

Not applicable.

Company agreed to perform reconciliations weekly but continues on a monthly basis. Finance and Loans directors now review and sign monthly reconciliations and the Company considers that weekly reconciliations are not ’ costeffective or vital for control provided that monthly reconciliations occur.

For non-legal correspondence, the Company judges that the additional cost would not be a justifiable use of public money. The Company agreed not to destroy reports which are now retained.

29


Possible risks to Hnanclal COnbOl

Key controls Control weaknesses Recommendations Management response from Company, including action taken up to 30 September 1992

SpeciHc sequential number ranges of documents issued lo higher education institutions.

Outside the Student Loans Company Maintenance by higher education institutions of records of those students whom they have certified as eligible and who have ceased lo attend their course before completing it.

Failure to perform certain reconciliations on loan documents issued by the printers.

No significant weaknesses found.

Inadequate records at some higher education institutions of students whom they had certified as eligible and who had ceased to attend their course before completing it. This could lead 10 delay or omissions in notifying the Company where such students ceased to attend. In NY 199Oi!X Company received late notitication of 363 students who had ceased to attend prematurely.

Pertorm reconciliations on loan documents issued by the printers.

None.

Institutions should maintain separate records of students who, having been certined as eligible, cease to attend their cww before completing it.

The Company agreed to amend procedures as apprapdate, now does the pdnting &house and performs the reconciliations.

Not applicable.

The Company reminded all institutions of their du,y under the Loans Regulations to notify the Company where students cease to attend their course prematurely and asked a,, institutions to complete a pm fDmw

lb, oar Within the Student Loans .-,

Incomplete recording of income. expenditure. assets and liabilities.

Regular supervised bank reconciliations.

Reconciliations oi iinancial control accounts to independent ledgers eg, fixed assets register and creditors ledger.

Regular operation of supervisory COntrOlS.

Review of unmatched orders for goods and services.

Failure to perlorm reconciliations often enough, and not enough evidence of management supervision of this task.

Poor audit tmil between individual fixed assets and the accounting records.

Reconciliation of fixed assets register and ledger not performed oHen enough, and not enough evidence oi management supervision of this task.

No management spot checks on petty cas.h and no reconciliation ;;fc&received to amounts

No formal ordering system in place before April 1991. In place

Perform reconciliations more often. Ensure greater evidenced management review over this task.

Individual coding of ail fixed asets

Perform reconciliations more often. Ensure greater evidenced management review over this task.

Regular management spot checks on petty cash and reconciliations of ca& received lo cash banked.

None needed.

The Company agreed to implement weekly reconciliations but continues to pedorm these wonciliations monthly. The Chief Accountant reviews them. The Company now considers weekly reconciliations neither cost-effective nor vital for control provided that monthly reconciliations occur.

The Company agreed to to implement but aHer consulting external and internal auditors concluded that it would be cost-effective to code only items of computer equipment with EC0 or more. The Company expects to complete coding by 31 December 1992 despite external audit advice that coding merited a low priority.

The Company agreed to implement the recommendation and now performs these rewnciliatimx on a regular monthly basis. The Chief Accountant reviews them.

Chief Accountant now pelforms these checks at least once a week.

No, applicable.

30


Possible risks to financial cO”trol

Key controls Control weaknesses Recommendations Management response lrom Company, including action taken up to 30 September 1992

Control Objective-Accuracy Risks could include: (a) 0” loans

lncwect recording of borrower details, including loan amount. Inwmct recording of loan payments and repayments. Loan payments and repayments at an incorrect amount.

Within the Student Loans Company

Loan dccumentation data input validity checks.

Loan payment dettils confirmed to source documentation before payment eg, loan payments reports checked to authorised loa” agreements.

Supervised review of Central Loans system ‘problem documents’ reports.

Reconcilations of Central Loans System payments reports totals.

Automatic oeneration of loan agreement&tails by the Central Loans System.

No signilicant weaknesses found NOW

Test check of authorised loan agreements to hm payments listings occurred alter release of BACS payment tape.

Inadequate control wer the posting of failed loan payments on the Central Loans System before March 1991. Adequate co”tm thereafter.

Ensure test check of signed loa” asreements to Central Lcans3ystem payments listings occurs before release of BACS payment tape.

None needed.

NO significant weaknesses found,

Company had to adjust the interest charges calculated by the Central Loans System, so as ta ensure charges were in accordance with the 1990 Loans Regulations. The National Audit Office found no case where the incorrect amount of interest was charged.

NO”.2 NO”.2

Central Loans System needs Central Loans System needs to calculate loan interest to calculate loan interest c~~ectly without the need c~~ectly without the need for separate adfustment. for separate adfustment.

Not applicable.

The Company now carries out sample test checks when payment listings are produced.

The Company was testing a central posting system at the time of the NAO’s review. This is complete and full functional.

Not applicable.

Since autumn 1991, the Company’s computer systems have calculated the correct amount of interest without any need for adjustment.

(b) Other Within the Student Loans Company

Incorrect recording of income, Creditor balances confirmed to expenditure, assets and liabilities creditors’ statement regularly. transactions. Income, expenditure, assets and liabilities transactions at the wrong amo”nt.

Evidenced check on the accuracy of invoices.

Payments details confirmed to source documentation before payment. eg matching orders to invoices.

Manual control totals for reconciliation to data input.

;r;ulsa;“B”n,“” Student Loans

Supervised checks at the Department to confirm the accumy of the Student Loans Company’s monthly claims for payments Of grant.

No reconciliations between creditors’ statements and creditors’ ledger balances.


Not enough evidence of the operation of payroll controls, such as approving payroll input documents and reconciliations of stall paid to stall in pOst.



Perform regular reconciliations between creditors statements and creditors’ ledger balances.

Improve management supervision and reconciliation procedures for payroll.

Suppliers rarely send creditors’ sctatements nowadays. However, the Company now performs re(ionciliations monthly where such statements are recetved.

Not applicable.

Chief Accountant now retiews an signs payrolls and attendant reconciliations and documentation monthly.

Not applicable

Not applicable.

31


Powfble dsks 10 ffnancial CO”bOl

Key confmls Control weaknesses Recommendations Management response from Company, including action taken up to 30 September 1992

Conbol Objecffve-Auffmrfoation Risks could include:

(6) on Loans Within the Student Loans Company

Loans not properly authorised Internal audit spot-checks on the Loans cancellec without propery Company’s third party loans authority. operations.

(b) General

Expenditure, including capital expenditure, not properly authorised. Unauthorised acces to assets.

Authorfsation of sioned loan agreement beforeioan payment.

Wfffdn lfw Student loans Company

Proper separation of duties between data input, processing and authorisation.

Proper and appropriate password mdml over enquiry. updafe and programming facilities on computer systems.

Ffeshfcted access to computer instaflations.

Provision of clearly defined authority levels including availability of specimen authorised signatory listings.

Formal capital expenditure requisition system.

Restricted access to the building and its assets.

Company safeguarded against dsk of fraud.

No internal audit spmahecks on Ensure internal audit carry Agreed lo implement. The the Company’s third parfy out spot checks on third Company’s infernal audit has operations, before April 1991. party operations. carded out an extensive

programme of inspections since April 1991.

No significant weaknesses found. None. Not applicable.

-

Pwr separation of duties for purchases and failure properly lo wfhohse ledger posfing vouchers in accordance with procedures.

No signiflcanf weaknesses found.


No sample signatuwinitial listings of those responsible for authorising goads and services.

No written procedures for cheque signing.

Poor control over capital expenditure before April 1991.


Possible financial dsk 10 Student Loans Company because Electronic Data Systems do not wry insurance to cover any liability arising if Electronic Data Systems’ employee fraudulently manipulates computer programmes or data to impact on _ _.._ a_-__

improve management checks over purchases recording, including ensuring procedures are followed with regard 10 journal voucher posting authorisation.

NOW2

Ensure payment authoriser has access to sample signature listing for staff responsible for wthorising goods and selyices.

Formalise cheque signing procedures.

None needed.

NOW

fnwtigate adequacy of insurance cover and extent of Electronic Data Systems’ ,iabi,ity in the circumstances.

Chief Accountant now authorises all journal voucher postings.

Not applicable.

Not applicable.

The Company now has sample signature listings, for comparison with wthorisstions.

Procedures manual now contains forma, authorised cheque signatories and signing limits.

Proper controls have been implemented since April 1991.

Not applicable.

The contract with EDs contains a provision whereby EDS might incur some liability. Because this might not fully protect the Company in all cases, the Company has obtained extra cow

32


Possible risks lo financial confrof

Key controls Control weaknesses Recommendafions Management response from Company, including action taken up lo 30 Sepfember 1992

Control Objective-Propriety and Validity

Risks could include:

(a) General

Procedures not oommensura,e with scheme rules and not adhered to.

Management ~Bucfure end Board sbucf~~e conducive to sound internal control appropriate lo the rules of fhe loans scheme.

Operation of effective internal No effective internal audit audit function reporting regularly function until February 1991. to management. Rectified there&r.

Provision of properly approved end readily applied loans and financial procedures manuals.

Examples of unclear reconciliation procedures in both the loans and financial procedures manuals.

No significant weaknesses found None

None needed.

Clarify reconciliation procedures in bath the loans and financial procedures man”als.

Not applicable.

The Company expected 10 infroduce additional detail info the manual by 31 October 1992. For loans, detailed desaipfions exist.

(b) On Loans Within the Stlldenf Loans Company

Loans advanced to ineligible students. Loans advanced for amounts outwith the rules of the scheme. Failure lo identity loans requiring cancellation.

Control numbering of loan dccumenfafion issued 10 higher education institutions for validation purposes at Student Loans Company.

Use of secure validation stamps specific to each higher education institution on the eligibility certificates.

Unique reference number for individual loans and borrowers.

Borrower signature validation on signed loan agreement before authorising loan payment

Outside the Student Loans Company

Proper separation of duties and records at higher education mshf”hons.

Provision 10 institutions of readily applicable guidance on eligibility certification.

Internal audit inspection visits lo higher education institutions.

Deficiencies in reconciliation procedures for documents issued to higher education institutions.

Inadequate control over eligibility oedilicate security stamp validation.

No signiffcant weaknesses found.

No signilioant weaknesses found.

Inadequate separation of duties end records at higher education ~nsf~tufions.

Misunderstanding by some higher education institutions of the eligibility regulations, in particular with respect lo “EC fees-only” students who are not entitled 10 a student loan.

Perform reconciliation of documents issued 10 higher education institutions lo those received by the Student Loans Company.

Perform security stamp validation check upon receipt of eligibility certificate.

NO”&

None.

Improve separation of duties and records at higher education institutions.

Further clarification in guidance on eligibility certification.

None.

The Company’s Cenfr~4 Operations Manager and Infernal Audit test check regularly. A formal reconciliation would not be wst+ffecfive.

The Company’s Internal Audit now control stamps until they are issued. Audit field inspectors check on serial number of stamps used. The Company considers it unnecessary end not cost~effective to keep a log and carry out reconciliations.

Not applicable.

Not applicable

Where appropriate, the Company will recommend the separation of duties.

The Departments’ Guidance to InStitutiona of September 1990 made clear (Summary page 2, Guidance paragraph 26 and appendix 2 Paragraph 26) that Students with EC fees-only awards were not eligible for loans. The Departments nevertheless provided further guidance in the 1991192 edition of their guide for colleges: “Student Loans-certifying efigibifiv’, including a diagrammefic guide 10 student eligibility. The Company’s fntemaf Audit offer guidance where appropriate.

Not applicable,

33

THB ADMINISTRATION OF STUDENT LOANS

Possible risks lo financial contml

Key contmls Control weaknesses Recommendations Management response fmm Company, including action taken up to 30 SepIember 1992

(C) me,

Expenditure not a proper charge on the body. Income not duly receivable.

F;U$e;he Sludenl Loans

Financial monitoring of Student Minor reporting failures between Ensure adherence to Practice has now been improved Loans Campany by the Student Loans Company and the piocedures. by amendments to reports to the Department through the Deparlmenl of Education and Department. evaluation 01 regular Student Science during 1990-91 financial Loans Company financial ,epoI1s, yea,, plans and funding claims (see Annex C).

Contml Objective-Economy and Elliciency

Risks could include:

(a) on loans Within the Student Loans Company

Loans not processed in the most Batch processing of loan economic and efficient manner. documentation. validation and

payment.

Maintenance of complete mio,ofilm record to, ease of access to all loan-related documentation.

Reliance an properly controlled compute, facilities rather than manual mocedwes.

“se of properly controlled BACS facilities for loan payments.

Xmely identification of loan repayments due.

Use of properly controlled third parties for specialist functions, where cost effective, eg printing and data preparation.

No significant weaknews found, NOW

Examples of manual procedures being used where properly cont,olled Central Loans System compute, facilities would be more emen,,

Review areas where unused Central Loans System compute, facilities could replace manual procedures. whilst ensuring adequate control.

Use 01 couriered SACS tape Use properly controlled possibly open to sophisticated telecommunications link to fraud. replace manual SACS tape


No signiticant weaknesses found,

NOIX

None.

NO significant weaknesses found. None

No, applicable.

Not applicable.

The Company is now almost totally computerised.

The Company has since introduced tape acceptance and validation procedures. As a result the Company judges that a co&red tape is now as secu,e as one sent “Ia a telecommunications link.

Not applicable.

Not applicable.

(b) Other Wilhin the Student Loans Company

Prmdures not mnducive to Full advantage taken of creditors’ No significant weaknesses found. NO!T Not applicable. economic and eRcient discount facilities. processing and recording of transactions. Cash handling procedures not timely and controlled. Non-timely payment of creditors and wlkction of income.

Automated and properly authorised bank account transfers. including the use of depait accounts. where appropriate.

Not applicable.

Budgetary control, including variance reporting.

No significant weaknesses found. NOI2 Not applicable.

34


Annex C Student Loans Company reports to the Department for Education

ouarterly

Monthly

Frequency Descrfption

Annual Curporate Plan

Summary of cuntent

Cash outtwn and three year cash forecasts; Corporate objectives: Output and pelformance targets: Review of strategy and planning assumptions:

Budgets Income and expenditure; B8fance sheellcapita expenditure; Cash budgets.

Annual cash farecasts Forecast loans and administration expenditure for three subsequent years.

Annual acco”nts

Outlurn report

Audited by 31 August each yea.

Actual income and expenditure for administration costs and loans for the quarter and projected yearend balance sheet.

Monthly funding report Cash income and expenditure outturn by month (cumulative); Bank reports for all accounls showing movements and interest: Loan disbursement report including SACS transactions and loan repayments: Cash requirements for loans and administration.

Ad-hoc Operational costs projected Projected breach of annual running cosls OYerr”n repolt cash limit.

Source: Demfment ol Education and Science financial omedures documents and Studenl Loans Commnv Accounfjnno Pmwdwes Manual

35

the administration of .student loans - national audit office · evaluation of the student loans...

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