Properly managing conflicts of interest and related party transactions is an essential part of the proper management of a school
At the end of 2014, the National Audit Office highlighted concerns about the high level of “related party transactions” entered into by academy trusts. While the report and much of the linked media coverage focused on the statistic that 43 per cent of the academy trust accounts examined disclosed related third party transactions, it is worth noting that only £8.6 million of these transactions were thought to result in a threat to the proper use of public money.
While any misuse or possible misuse of public funds is a cause for concern, the statistics suggest that more than 99.9 per cent of the transactions made by these trusts did not pose a risk to public money and, as is so often the case, those that did cause concern appear to have been made by a relatively small number of trusts rather than representing a problem across the board.
Properly managing conflicts of interest and related party transactions is an essential part of the proper management of a school and, given the public and media interest following the NAO report, is an area that is likely to be subject to ongoing scrutiny. It is therefore important that all academy trusts can demonstrate that they have robust and effective procedures in place for identifying and dealing with any conflicts.
Although the rules on related party transactions and “at cost” principles may seem straightforward, they will often require decisions based on judgment rather than simply applying a set of rules. Boards of academy trusts without sufficient experience to make these decisions will need to take professional advice.
Conflicts of interest are not at all unusual, and are not necessarily a problem
Conflicts of interest are not at all unusual, and are not necessarily a problem. Schools may receive very good value for money as a result of the close relationships. Each potential transaction should be assessed on its own merits, but an academy trust that adopts a policy of avoiding all related party transactions may well end up missing out on the benefits of some of those relationships.
The key to addressing conflicts of interest effectively is to ensure sufficient openness and transparency, and to make sure that they are in accordance with proper written procedures. Those procedures should include:
– keeping an up to date register of all the interests that could potentially fall foul of the connected party rules
– preventing a conflicted individual from participating in any decisions associated with the proposed transaction
– identifying the process that will be followed to ensure that the services of the connected party are procured through a fair and open process
Once an academy trust has decided to enter into agreement with a connected party, then it is required to comply with the “at cost” provisions that are set out in the Financial Handbook.
These rules require the connected party to provide the goods or services at no more than they “cost”. It is clear that the “at cost” amount can include both the direct and indirect cost of providing the particular good or service to the academy, without any profit element, but it is still very difficult for an academy to assess whether the service is actually being provided “at cost”, and for connected parties to know exactly what the true cost of their service actually is.
Again, the best way for an academy trust to deal with this requirement is through having a clear policy setting out the steps that will be taken to confirm that the “at cost” provisions are complied with whenever they enter into a connected party transaction.
The way in which academy trusts manage their conflicts of interest and connected party transactions will undoubtedly remain in the public spotlight and it is essential that all academy trusts equip themselves with the appropriate tools to deal with them whenever they arise.
Alison Talbot is a Partner at law firm Blake Morgan