Academy related party transactions

 

Academies, as with other schools will often transact with individuals that are governors or businesses that they are connected to. A vast majority of these transactions will be as a result of individuals being willing and able to provide the service that the academy needs whilst providing the best value for money that the academy could obtain. In some cases however, the acts of a few individuals can mar the public perception of what is going on in a vast majority of these schools.

Newspaper headlines such as ‘Revealed: taxpayer-funded academies paying millions to private firms’ or ‘Academies paying millions to businesses linked to their directors’ will raise public awareness of the scale of these transactions in some academies. Whilst as statements of factual transactions the articles may set out the scale of some connected party activity, without context they are meaningless. A fear of these articles certainly shouldn’t be a driver for policy decisions around the majority of connected party transactions.

The rules surrounding the award of work by academies to connected parties are relatively clear and have been in place for a number of years. These rules, outlined in the articles of association of the academy and the Academies Financial Handbook are set to prevent the award of work to a connected party with anything other than an academy’s best interests at heart.

New rules applicable from November 2013 extend requirements for transactions with connected parties to ensure that they are on a no-profit basis. A more arduous regime than is seen in the maintained schools sector and, in some cases, is already causing academies a headache.

For example, a governor’s other business interest may be able to provide services cheaper than other rivals even if they plan to make a profit. Should the governor be forced to lose the opportunity for their own business to make a profit elsewhere by working at a no-profit? The academy cannot accept the quote if it includes profit. Compliance with the no-profit requirement in this case is arguably less likely to obtain value for money, which is a staple of the Handbook in itself. Who loses out here? The academy? The public purse? The children?

The chair of the Public Accounts Committee, however recently branded the value for money justification by the Chief Financial Officer of the EFA as ‘nonsense’.

The mitigation of risk through the ‘holier than thou’ appearance of these transactions could have an unintended adverse effect on the well-meaning majority of academies and their governors. Academies need more guidance as to what to do in these circumstances.

The auditor of the academy, in reporting on the truth and fairness of the annual accounts and the regularity and propriety of the transactions therein, will be expected to highlight where these transactions are not adequately disclosed or have been undertaken without complying with the rules in place to protect the sector.

The auditors themselves have rules in place to protect them from missing transactions that they really should be in the best possible position to highlight. International Standard on Auditing 550 Related Parties tries to help put the on-site audit teams in a position where they can spot things that shouldn’t be happening. Guidance provided by the Education Funding Agency also notes that they ought to look at the process of awarding transactions.

As auditors await guidance for the accounts disclosure and assurance for 2014, the Education Funding Agency, National Audit Office (as the EFA auditors) and Public Accounts Committee are currently taking a keen interest in the work done by auditors on related party transactions in 2013.

The risk of the auditor being associated with individuals at academies that don’t play by the rules is considerable. Connected party transactions should always have been an area of prime focus but audit teams working with academies need to be aware of the environment they are working in.

Published Date: 
Tuesday, 3 June 2014