Academy accounts hearing: 7 things we learned

MPs have today grilled the government’s top education officials over the state of academy finances.

The parliamentary public accounts committee held a session with Jonathan Slater, the Department for Education’s permanent secretary, Mike Pettifer, its acting director of academies and maintained schools, and Eileen Milner, the chief executive of the Education and Skills Funding Agency.

The hearing was held in response to the consolidated annual report and accounts for the academies sector, which were published last autumn for the first time.

1. More academies will go into deficit

The government expects the number of academies in deficit to increase, Slater said.

He told MPs that the number of maintained schools in surplus had dropped between 2015/16 and 2016/17, and that he “wouldn’t be surprised at all” to see a similar change in academies.

Slater said some academy trusts “have not been managing their resources properly”, and that he would “expect to see an increase in the number of trusts in deficit” in 2016/17.

2. No trust is ‘too big to fail’

Despite concerns about some academy trusts having expanded too quickly, none are “too big to fail”, according to Slater.

Responding to a question from MP Gillian Keegan, he did admit that in the past some trusts “grew too big too quickly”.

3. Related-party transactions can be ‘jolly good’

According to Slater, related-party transactions (payments by academy trusts to private companies with links to people involved in the trust) can be “a jolly good thing”, as long as there is “transparency”.

Around 40 per cent of academy trusts hire firms with links to their people, but those companies are only allowed to provide the work “at cost”, so they cannot make a profit.

“Any related-party transaction for profit is not allowed and we will take action,” Slater said, agreeing to take back MPs’ concerns about such transactions and “reflect on it”.

4. Two thirds of small trusts couldn’t justify salaries over £150,000

The MPs heard that the ESFA had already written to 29 small trusts paying staff over £150,000 asking them to justify the salaries – and that two thirds had not been able to give a reasonable explanation.

Slater also said the ESFA would take direct action to reduce pay if it was found to be causing financial difficulties in trusts.

5. Almost 40 trusts have been ordered to improve their finances

According Milner, there are currently 39 academy trusts that are subject to financial notices to improve.

Such notices are issued by the government when trusts are found to have breached funding rules. Spending powers are restricted, and it can ultimately lead to academies being rebrokered to other sponsors.

Milner said the number of financial notices to improve was reducing “as trusts ask for help earlier” and because the DfE steps in earlier.

6. There was due diligence over Whitehaven Academy, but ‘things go wrong’

Slater and his colleagues faced a lot of questions over the problems facing schools in the north of England run by the Bright Tribe academy trust.

The trust’s issues came to a head last autumn when it announced it would walk away from Whitehaven Academy, a secondary school with buildings in a terrible state, and a dubious quality of education.

When asked by public accounts committee chair Meg Hillier what due diligence had been carried out when Bright Tribe took on Whitehaven, Slater said procedures were followed “but sometimes things go wrong”.

7. Academy land valuations taking ‘longer than hoped’

The government won’t be able to publish the next set of academy accounts before the summer recess this year because it is taking so long to verify land valuations.

The 2015/16 academy accounts were criticised by the National Audit Office last year, in part because the DfE was unable to provide “adequate evidence” about the £45 billion of academy land and buildings included in the accounts.

Today Slater admitted that efforts by the DfE to establish how much all the land on which academies operate is worth is taking “longer than hoped”. Officials have had to go over 13,000 documents, he told MPs.

It had been hoped that the accounts would this year be published before Parliament goes into recess in July, but they look unlikely to be out before October.

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  1. Allan Hickie

    Re no. 3. So, “Around 40 per cent of academy trusts hire firms with links to their people”.

    As an auditor who works with a large number of academies I’d suggest a high proportion of this 40% actually relates to transactions with other educational institutions, charities and similar not-for-profit entities that academy trust directors are routinely involved with. From my experience a very small number of connected party transactions are with commercial companies, and, as the article says, these have to be carried out “at cost” to comply with the Academies Financial Handbook.

    Most trusts shy away from connected party transactions because they are aware of the scrutiny they will come under. This is actually quite sad. If a director has connections with a company, or has specific skills, why shouldn’t the trust be able to utilise them? Yes, the individual or their company should not be able to benefit unduly, but if the trust goes out to tender and the connected organisation can provide the service at a comparable price to competitors, why shouldn’t the trust be able to engage a company who one could expect to have the trust’s interests at heart?

    Trusts are required to demonstrate value for money at all times – the “at cost” rules can actually contradict this because it is possible for a scenario to exist where a connected party could provide a better service at a better price but the trust is unable to enter into the transaction unless the connected party signs to say they are making no profit whatsoever. In such a scenario the trust is almost forced into accepting an inferior, more expensive quote!

    Anyway, there’s lots on this website about these kind of transactions, mostly negative. Hopefully this gives some context before everyone gets carried away again just because a tiny percentage abuse the system.

  2. Allan Hickie

    AssemblyTube: yes, ‘at cost’ effectively means all direct costs (for the goods, or labour costs) plus a reasonable proportion of overheads. It can be more challenging to decide what is at cost for services especially as many companies would use day or hourly rates. There has to be a sound reason behind the at cost principle – for example trusts could demonstrate they are charging less than their usual rates, which probably have some profit factored in. Academies should be aware of the need of transparency and scrutiny in this area, and it is the part of the role of auditors to challenge. Auditors raise management letters setting out issues identified and concerns that do not go into the public domain but ESFA do receive copies of these, so there is plenty opportunity to highlight concerns even where there is no obvious breach of legislation.

    The Wakefield example does seem to be one of the more commercial related party transactions. It is a large amount, which may or may not be justified. I don’t know enough about their circumstances to comment, but they say they went through a proper tender process. Given the relatively high amount the trust should be clear on how it demonstrates value for money.

    As with most things if someone wants to abuse the system it is often hard to stop them. Systems should make it hard to do so, but overbearing personalities and collusion can circumnavigate systems. ‘At cost’ can be manipulated but any blatant case should be identified by auditors and flagged. Most trusts engage an external firm to provide internal audit services throughout the year so this is not restricted to once a year when the statutory accounts are audited. By dealing with and punishing those found to abuse the system others that may be tempted should be discouraged.

    From her comments on a variety of posts on here Janet clearly has an agenda against academies. There have been, and continue to be, badly run academy trusts but there is little point continually citing the handful of very high profile cases. My academy clients are continaully shocked when anything like Perry Beeches hits the press and finance staff and trustees alike are staggered how someone thought they could get away with it. It is important to keep a balanced view.