London Metropolitan University was "operating blindly", with key decisions being made by managers and governors in the absence of solid facts, according to an independent auditor's report into incorrect student-data returns at the institution.

The auditor's conclusions are disputed by London Met, which says its senior management team was fully aware of the facts and denies any suggestion of recklessness.

The Higher Education Funding Council for England commissioned BDO Stoy Hayward last year to review London Met's approach to student records after inaccuracies were discovered in its student-data completions.

The institution is repaying ?36.5 million after Hefce found that its student non-completion rate was 30 per cent, rather than the 3 per cent or so it had reported. A further ?15 million has also been held back from London Met's recurrent teaching funding.

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The university admitted including in its data returns students who did not fit Hefce's definition of completion, but said that it had "deliberately and consciously applied a certain interpretation of (Hefce's) rules on (reporting student non-completions), which it had signalled to Hefce in advance of its application and had been encouraged by Hefce to pursue".

Hefce said it never approved the university's interpretation of its non-completion rules, and added that it raised problems with completions data during two audits.

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BDO was asked to audit the university's data returns for 2006-07 and to assess the extent to which the findings of two Hefce audits for 2003-04 and 2004-05 had been acted upon.

The BDO auditors, who reported in January this year, found that the university's processes for compiling, reviewing and authorising data returns were ineffective.

They said that Brian Roper, who was vice-chancellor then, and his senior management team had not passed key information such as Hefce letters to the governors, who had in turn failed to carry out their assurance responsibilities effectively.

Hefce's report from its 2005 audit warned that a ?5 million "downward adjustment" of London Met's funding was in the offing and that a "number of instances of full-time students with very low levels of activity" had been uncovered.

A note attached to the Hefce auditor's report from the university's director of finance acknowledged that London Met's "assumptions and student classifications" were "no longer acceptable to Hefce".

But BDO said the finance director's statement was not followed up by the university and the ?5 million adjustment was not "followed through" by the governors.

In response, London Met told Times Higher Education that the finance director had been talking about a different group of students and complained that the audit did not highlight the issue of non-completions.

It denied the suggestion that Mr Roper had deliberately concealed the non-completion issue from London Met's governors or its audit committee, saying that it was "without any basis, not least since the relevant Hefce correspondence did not identify that issue".

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The BDO auditors also criticised Hefce for not being "more explicit" on the issue in the documentation issued to London Met following the 2005 audit.

By 2006, the university was running "financially blind with no reasonable mechanism to understand its base funding level", BDO concluded.

It said that as recently as November 2008, London Met was still submitting to the Higher Education Statistics Agency data in which the auditors had "no confidence".

'Significant omission'

The university said there was a "significant omission" from the BDO report, stating that in 2008 London Met prepared its return for 2006-07 on a basis "agreed with and understood by Hefce" that would reflect its 2005-06 approach, as it was "too late to introduce a significant change of approach".

The university pointed out that its 2006-07 return was completed before the outcome of Hefce's audit of the 2005-06 report was made known to it, so "inevitably the issues identified for 2005-06 (in 2008) were largely replicated" in the 2006-07 return.

The BDO auditors found that management had also been taking critical decisions on funding that should have been discussed at board level.

"Nowhere in the board papers have we seen representation from the designated officer (the vice-chancellor) providing sufficient information to the board to enable it to take reasonable decisions to ensure that the university planned its affairs so as to remain solvent," the BDO report says.

On several occasions from 2004 to 2007, Mr Roper had not presented letters from Hefce to the governors, and in particular the audit committee, the report says.

And while members of senior management were aware of potential problems with the data, they did not bring them to governors' attention other than through the vice-chancellor, it adds.

London Met said senior management was unaware of the potential problems, which it said had not been identified by any Hefce audit.

For example, it said that there was "nothing in the 2005 Hefce audit report that signalled any significant issue with regard to non-completion".

It said the problem identified was considered to be connected with enrolment status and mode of attendance, not non-completion and funding definitions.

The BDO report also says that there were "significant gaps" in internal auditors' reports that resulted in a "total reliance on management".

It criticises the governors' oversight of management, saying: "Both the audit committee and the finance and human resources committee should have pursued their responsibilities more effectively ... the overall governance at the university in relation to data issues was not effective."

The auditors were unable to find in any of the board or committee papers any discussion "around the risks of the university's practice with regard to non-completions compared with Hefce rules in the area".

Lawyers for London Met said the allegation that the vice-chancellor and other officers had knowingly withheld information from the board was "without the slightest factual foundation".

A London Met spokeswoman said that "reports were made to the board of governors 12 times between 16 December 2004 and 12 December 2007".

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"These reports covered potential holdback at the levels indicated by Hefce at that time and of the financial implications of that holdback," she said. "There was no specific control issue ... in the audits before 2007 that identified a need to follow up other than through the normal internal audit processes."

The internal audit reports were adequate, the university contended, and "London Met's management formed a reasonable interpretation of the rules in good faith and encouraged by Hefce".

Until September 2008, London Met's audit committee was headed by Sir Michael Snyder, a member of the Chancellor of the Exchequer's "high-level group" on City competitiveness.

In August 2008, Hefce placed a new requirement on audit committees: that they report their opinions on "arrangements for the management and quality assurance of data" submitted to funding bodies.

Prior to that date, Hefce said data management was covered by audit committees' overall assurance functions.

"As data management is part of the internal control system, it follows that universities' audit committees should always have had an eye on the risks in this area," a spokesman for the funding council said.

"The data submitted to Hefce by most institutions forms the basis for their biggest income streams. Thus, the data returns to us constitute a major risk to the institution.

"Major risks should be of interest to governing bodies and their audit committees."

London Met has denied that its audit committee should have done more. "The committee had no role and was not expected by Hefce to have a role in the detail of such returns," the spokeswoman said.

BDO's overall conclusion was that the inaccuracies in the university's data returns were a result of problems in their preparation rather than fundamental errors in the underlying data.

Legal threat

In February 2009, lawyers representing Mr Roper, who has since stepped down but remains on the university's payroll until the end of the year, and a number of London Met's governors wrote to Hefce threatening legal action if the BDO report were to be released.

A university spokeswoman said the report, which was obtained by Times Higher Education under Freedom of Information laws, "lacked independence, failed to acknowledge the role played by Hefce in the events leading to the university's current financial situation and contained numerous factual inaccuracies".

She added: "The review was carried out by a BDO partner who is a former member of the Hefce audit committee, assisted by a Hefce auditor who had conducted the two previous Hefce audits during the period under review, which failed to identify the critical issue."

The fact that the BDO report had not been presented to Hefce's board suggested that London Met's criticisms of it were "substantially justified", she added.

In a statement, BDO says: "We conducted our work independently and to the highest professional standards. We stand by its accuracy."

A Hefce spokesman also rejected the university's criticisms.

The BDO report had not been published because of the threat of a defamation claim by London Met and because it had "served its purpose", he said.

"It enabled the amount of holdback to be determined and it prompted the university board to take action on leadership," he said.

"We are satisfied that we have taken such steps as are reasonable and appropriate to verify the accuracy of the report, short of rerunning the audit."

While the BDO partner had previously been a member of Hefce's audit committee, he had been an independent external member and left in 2006, the Hefce spokesman said.

The former Hefce auditor provided "a small amount of assistance" to the BDO team early on in its work, he added.

He also said the funding body's decision to audit three consecutive years of university data returns was "unprecedented".

Hefce has commissioned a "lessons-learnt" review of its role in the case from KPMG.

Publication of this report, which makes eight recommendations to Hefce covering data-assurance processes, legal issues and use of external advisers, is imminent.

"Our processes have proved effective in the past but were severely tested in this unprecedented case," the Hefce spokesman said.

melanie.newman@tsleducation.com

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Problems identified with London Met's processes in 2006-07 by the BDO report:

• Part-time courses were classified as full-time-fundable in data returns.
• Students were included in the Higher Education Students Early Statistics Survey (HESES) 2006 return as fundable although they had not appeared in the Higher Education Statistics Agency's 2006-07 return.
• A significant number of students were recorded as full time in HESES and part time in Hesa, and vice versa.
• The length of students' courses included in HESES 2006 did not tally with the length of courses in Hesa's 2006-07 data.
• Data returns included students who were taught wholly outside the UK, who had dropped out before 2 December 2006 and who were on sabbatical.

The university said the numbers of these students were "exceedingly small". It had a flexible student population and it was "not unusual" for students to change from full-time to part-time learning during a year. Differences between HESES and Hesa data were "inevitable", it said.

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