Education Funding Agency and Department for Education 2012-13 financial statements - Public Accounts Committee Contents

Conclusions and recommendations

1.  The Department for Education created the Education Funding Agency in April 2012 to ensure efficiency, accountability and transparency in the education sector. In 2012-13, the Agency distributed £51 billion of capital and revenue funding for 10 million learners to local authorities, academies, academy trusts, further education institutions, sixth-form colleges and other types of education providers. Since it was established, both the scope and the scale of the Agency's activities have changed and expanded rapidly: for example, during its first year the number of academies almost doubled to nearly 3,000 and it took on new responsibilities including managing the Youth Contract for 16- to 17-year-olds. Between 2012-13 and 2015-16, the Agency expects that the number of all education providers it funds will increase by around 50% to almost 12,000, of which nearly 7,000 will be academies. At the same time, the Agency plans to reduce its administration costs by 15%. Ensuring proper accountability for public spending with less resources will be a huge challenge and the Department has yet to demonstrate that it can meet its responsibilities for proper accountability.

2.  The Agency is accountable to the Department for the funding it distributes and, in turn, the Department is accountable to Parliament for ensuring regularity, propriety and value for money in the work that it and the Agency undertake. In 2012-13, the Department and the Agency consolidated academies into their financial statements for the first time, and laid their annual reports and accounts just prior to the statutory deadline of 31 January 2014. However the Comptroller and Auditor General qualified his opinion on these financial statements on a number of grounds relating to both poor data and inadequate methodology.

3.  The Agency lacks the systems and data it needs to provide transparency and accountability, and demonstrate efficiency, in the education sector. We recognise the Agency's success in moving quickly to distribute funding on time. At the same time, the Agency has had to manage a huge expansion in the number of academies. But the Agency now needs to get to grips with improving the information that is vital to its critical oversight role. The Agency relies on information provided by academies, local authorities and other government bodies on, for example, learner numbers, the size and condition of schools and in some cases their finances. But the Agency has found it difficult to gather complete, consistent and high-quality data. It does not have a clear policy or understanding of what data it needs to collect, and how it will use these to provide Parliament and the public with sufficient transparency over education spending and, in turn, to support proper accountability. It has contributed further to the problem by holding data across a range of different systems and spreadsheets, from which it is challenging to establish a 'single version of the truth' and impossible to make sensible comparisons.

Recommendation: The Agency needs a clear information strategy, which specifies the data it needs to collect and use to provide transparency and accountability and improve efficiency in the education sector. It also needs to get systems in place as quickly as possible to capture data at low cost and without overburdening the sector.

4.  The Agency has not yet achieved an acceptable level of compliance with its reporting requirements. The Agency requires some education providers, such as academies, to submit various financial returns and other information in line with funding agreements (a contract between them and the Secretary of State). But a number of providers still do not comply with the conditions of their funding agreements. Between April 2012 and April 2013, there were 411 breaches of funding agreements, of which 339 (82%) related to academy trusts' failure to submit financial returns on time, including submitting annual accounts. For 2011-12, 13% of academy trusts failed to submit annual reports and accounts by the deadline of 31 December 2012 and for 2012-13 this figure still stood at a worrying 9%. Where academies do not comply with the Agency's requirements it can issue them with a financial notice to improve, so they lose some financial freedoms and flexibilities or ultimately the Agency can terminate a funding agreement. By March 2014 the Agency had only issued eight financial notices to improve to academies. But the Agency has yet to demonstrate an effective approach to ensuring proper compliance and has yet to show that restricting financial freedoms works as an effective deterrent for non-compliance.

Recommendation: The Department and Agency need to implement an effective joined up strategy for enforcing compliance with funding agreements and consider appropriate incentives and sanctions.

5.  The Agency is too reactive and does not spot risks or intervene in schools quickly enough. The Agency's knowledge of poor financial management or governance in schools does not come from a systematic or forensic analysis of the data it holds in order to identify risks; instead, it relies on broad desk-based reviews that are not sufficiently risk focused. The Agency also relies on whistleblowers, and the work of external auditors of academies. As a result, Agency interventions in at-risk institutions can come too late, as in the case of E-Act Academy Trust. Even when the Agency is presented with data that should trigger concerns and lead to further investigation, the Agency has not always taken action quickly enough, as in the case of Kings Science Academy in Bradford. The Agency accepts that it needs to improve its data analytics and horizon scanning.

Recommendation: The Department and Agency should set out how and when they will develop an analytical capability to spot risks and target their interventions early.

6.  The Agency does not know enough about conflicts of interest in academies and the risk they pose to the proper use of public money. We were concerned that individuals with connections to both academy trusts and private companies may have benefited personally or their companies may have benefited from their position when providing trusts with goods and services. The Agency has reviewed 12 cases of related-party transactions, when a conflict of interest could arise; but it is likely that many more exist and have gone unchallenged by the Agency. In line with accounting standards, academy trusts are required to disclose related-party transactions in audited accounts, but the Agency does not keep a log of such transactions, and is unaware of how many disclosures have been made. The Agency now insists that goods or services provided by individuals or organisations connected to academy trusts, such as trustees, or relatives of trustees, are provided at no more than cost, but it only introduced this rule in November 2013. The Department takes the view that related-party transactions are acceptable. We feel that related-party transactions are always open to accusations of conflicts of interests, even when supposedly on a no profit basis.

Recommendation: The Agency should reconsider its policy which permits related- party transactions. At the very least it must be able to extract and analyse complete information on related party transactions and must then use that analysis to determine risk-based interventions.

7.  The Agency has no way of knowing whether academy chief executives and trustees are 'fit-and-proper persons'. In a very devolved system, as in the case of academies, a lot of trust is invested in the organisation, chief executive, principal and trustees for managing public money. It is therefore reasonable to expect that these people are properly vetted. The Department has a process to vet those planning to open free schools; however, it told us that it does not have a fit-and-proper persons test for vetting those appointed as academy trustees or chief executives. At Kings Science Academy, the Agency did not even know who the chair of trustees was.

Recommendation: The Department should introduce, at individual academy and academy trust level, a fit-and-proper persons test.

8.  There are flaws in the methodology used to consolidate the accounts of academies, as well as data quality issues, which undermine accountability. In 2012-13 the Department and the Agency consolidated academies into their financial statements for the first time, and the C&AG qualified his opinion on a number of grounds, relating to methodology and poor data. Of four qualifications, the Department accepts that two will be difficult to rectify. First, the Department has to consolidate academies' September-to-August accounts into its own April-to-March account, which involves making adjustments that carry risks. The Department intends to discuss what to do about this with HM Treasury and the National Audit Office. Second, the Department knew what land and buildings were used by academies, but did not always know who owned them. The Department predicts that it would cost £30 million to collate the necessary data on land and buildings and a further £8 million a year to keep these data up to date.

Recommendation: The Department should set out how and when they will address the causes of each of the qualifications of the C&AG's opinion, particularly those relating to issues of methodology or poor data quality.

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Prepared 10 June 2014