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

2  Improving financial management and governance

15. We were very concerned about trustees and others connected to academies potentially benefiting personally from contracts with schools to supply goods and services.[32] The Agency told us that it had improved its guidance on this over the last two or three years, which is in the Academies Financial Handbook. The Agency requires academies to declare related-party transactions, and to ensure that goods or services are provided by individuals or organisations connected to the trust at cost but it does not prohibit related-party transactions.[33] The Agency told us that it introduced the no-profit requirement on such transactions in November 2013. We will be seeking reassurance that this will not merely lead to suppliers increasing costs artificially to compensate for any loss of profit.[34]

16. The Agency considered that there can be good reasons for connected parties wanting to get involved with providing goods and services to local schools. To guard against conflicts the Agency requires that a school uses a competitive process for procuring goods and services, and excludes individuals with potential conflicts of interest from decisions relating to procurement.[35]

17. We asked the Department how it collects information on any related party-transactions, which could lead to a conflict of interest, and what it does with this information. In line with accounting standards, academy trusts are required to disclose related-party transactions in audited accounts and the Agency told us that it reviews the accounts for such transactions.[36] It had identified 12 academy trusts with significant related-party transactions that it wanted to explore further. The Agency told us that it does not keep a log of related-party transactions, and it could not tell us the number of such transactions disclosed in the 1,400 sets of accounts that it received in 2011-12.[37]

18. We questioned the Agency's capacity to spot related-party transactions given that it is dealing with so many education institutions. We were concerned that the Agency might not know the true extent of related-party transactions in all education providers—even if it implements sophisticated monitoring arrangements—in the same way that the accountability system in local authority settings might identify these transactions.[38] The Department told us that much of the responsibility for spotting related-party transactions falls on academies' auditors. It also told us that it was working with academy auditors to ensure that they meet the standards required by the Department.[39] In response to our concerns, the Department agreed that it needs to reflect on the issue of related party transactions and consider stronger action.[40]

19. The highly devolved academy system invests a lot of trust and public funding in academy trusts and their trustees and chief executives and we asked the Agency whether it carries out fit and proper persons tests.[41] The Agency told us that it had a process to vet individuals in groups seeking to establish free schools, but that it did not have an equivalent test for individuals appointed as academy trustees, or as academy chief executives. At Kings Science Academy, for example, the Agency was not aware who the chair of the trustees was, despite the Academies Financial Handbook requiring academy trusts to notify the Agency of key staff and changes to staff, including the chair of trustees, principal finance officer, and chief executive or principal.[42] We asked that the Department report back to us on whether it planned to carry out fit-and-proper persons tests.[43]

20. 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 the Department's financial statement on a number of grounds.[44] The consolidation had been a complex exercise that had presented the Agency with a number of problems. Academy trusts have different year-ends and different accounting frameworks to the Agency, which meant the Agency had to make adjustments on consolidation. The Agency had also received poor quality data from academies, which had resulted in a significant level of corrections and missing or late returns.[45] We pressed the Department on how soon it could remove the C&AG's qualifications on his opinion. Of the four qualifications, the Department told us that it expects to have rectified two of these by next year. However, it considers that the qualifications relating to different year-ends and ownership of academies' land and buildings will be more difficult to remove.[46]

21. On the C&AG's qualification relating to different year-ends, the Department told us that it made perfect sense for a school to produce its own accounts on an academic-year basis to 31 August, as a school sets it budgets, recruits its staff and receives funding based on the academic year. The Department explained that this had caused it problems when consolidating academies' accounts into its own financial year account ending on 31 March. However, the Department considered that, for academy accounts to be of most use at local level, they should continue to be produced on an academic year basis.[47] The Department told us that it was in discussion with both HM Treasury and the National Audit Office about what it could do to resolve the problems of making adjustments that carry a risk of qualification. The Department questioned whether the current approach was the most helpful way of presenting information to Parliament and others.[48]

22. The Department acknowledged that the qualification on land and building recognition would also be very difficult to address. It had a clear idea of the land and buildings used by academies, but it did not have a clear picture of who owned the land and buildings, particularly for ex-voluntary aided schools, many of which were historical buildings.[49] As a result, the Department could not demonstrate which land and buildings used by academies should be included on its balance sheet. The Department estimated that it would cost £30 million to collate data on land and buildings and a further £8 million a year to keep the data up to date and it was not convinced that this would represent value for money.[50]

32   Qq 33, 39, 44, 58-59, 63, 65, 133 Back

33   Qq 16, 33; C&AG's Report paragraph 1.23  Back

34   Qq 61, 63, 113 Back

35   Qq 63, 115; Note from Department to Committee dated 8 April 2014 Back

36   Qq 33, 63, 107, 114, 118 Back

37   Qq 33-34, 107, 109-112, 120, 167, 169, 172, 174, 177 Back

38   Q 44 Back

39   Q 55 Back

40   Qq 67-68, 174 Back

41   Qq 121-123 Back

42   Qq 167-168, 172 Back

43   Qq 123-124, 134 Back

44   Department for Education, Consolidated Annual Report and Accounts Back

45   Q 17; C&AG's Report paragraph 1.26 Back

46   Qq 140-141 Back

47   Qq 84-86, 141 Back

48   Q 140 Back

49   Qq 141, 146-148 Back

50   Qq 141-145 Back

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Prepared 10 June 2014