NAO gives ‘qualified’ opinion on DfE’s first academies accounts

The Department for Education’s first consolidated annual report and accounts for the academies sector has been met with a “qualified” opinion by the National Audit Office.

Sir Amyas Morse, the comptroller and auditor general at the NAO, has found that despite improvements on previous years, the DfE was unable to provide “adequate evidence” about the £45 billion of academy land and buildings included in the accounts.

A qualified opinion is provided by auditors when the information provided to them is too limited in scope.

This is the first time the DfE has prepared separate accounts for the academies sector, instead of consolidating them into its own accounts.

The department was prompted to put together the new report by ongoing problems with rolling the accounts of more than 3,000 academies into its main accounts.

Although the DfE has “significantly improved” the timeliness and quality of its financial reporting and made “good progress” in addressing issues relating to accounting for land and buildings, “significant weaknesses remain”, the NAO said.

“The Department is unable to provide me with sufficient, appropriate evidence that the carrying value of the academy trust land and buildings it has recognised is a materially accurate reflection of the fair value of the underlying estate,” said Morse.

He had noted “a number of weaknesses” in the department’s approach to valuing its land and buildings in his report on the 2015-16 departmental accounts.

“The department has made good progress in addressing these issues for the 2015/16 Academy Sector Accounts. It has reviewed its valuation methodology and strengthened its controls over its professional valuation process.

“However, significant weaknesses remain, particularly around the department’s processes to ensure that the asset valuations included in the accounts reflect the current condition of the sector’s estate.”

According to Morse, further improvements are needed if the DfE is to receive an unqualified audit opinion on future accounts.

“The introduction of the academy sector accounts has allowed the department to publish information on the academic performance of academies in the same document as the sector’s financial position for the first time,” he said.

“Further improving the timeliness and accuracy of the accounts will support more effective parliamentary scrutiny of how taxpayer’s money has been spent and what has been achieved.”

The department can also “make greater use” of the data it collects to “inform its oversight of academies” and help them improve their financial management, Morse added.

A spokesperson for the DfE said: “We will continue to work closely with academies and professional valuers to make sure we have the most accurate information on the value of their land and buildings. Although academy trusts are responsible for their own accounts, they are rigorously scrutinised according to strict rules.

“We are pleased that the National Audit Office has recognised the improvements that have been made to our accounting process and we will continue to work with academies to provide greater transparency over their finances and assets.”

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  1. Talk about misplacing a few quid behind the sofa. The DfE cannot provide “adequate evidence” about the £45 billion of academy land and buildings included in the accounts.

    That’s £45,000,000,000 that no-one is quite sure about!

    No wonder the Hedge Fund Managers have been sniffing around and getting themselves Lordships at the DfE.

  2. Mark Watson

    An Academy Trust “owns” land and buildings because it either owns the freehold to the land or has a 125-year lease.
    So what is the value of this ownership?
    I own my house, and it has a value because I can sell it to anyone I want to. The ‘value’ is the estimated figure that I can sell it for.
    However an academy trust does not have the same freedom. It cannot simply sell its land on the open market, and in any event the DfE usually has an option to purchase the land for no cost. It cannot even borrow money against the land.
    So you tell me, how much is an individual school held by an academy trust worth? Given the above, I could strongly argue it’s worth nothing.
    The DfE published accounts states that academies hold land and buildings worth £45.4 billion. As I see it this is purely an accounting fiction and has no real world meaning in any sense whatsoever. If the figure was £45 trillion or 45p it would make no difference.

    • Mark – the DfE explains how it values academies and and buildings here Do I understand it? No.
      In its guidance to academies re their financial returns, the DfE says:
      ‘The land and building collection tool (LBCT) is a new return which asks for a listing of land and buildings specifying the occupation route (for example freehold, leasehold). This information enables ESFA to report full information on the land and buildings held across the sector in the sector annual report and accounts (SARA).’ (Can’t provide a second link as this would hold up comment in moderation).

      The NAO doesn’t seem convinced that this LBCT is enough to show a true value.

      In addition, accounts for free schools often show ‘charges’ against the free school trust in favour of the DfE. This allowed the trust to buy the freehold. Presumably the DfE knows the value of these charges. But does anyone else?

      • Mark Watson

        But this reinforces what I’m saying. The DfE says they “procure these valuations to allow us to consolidate academies (as part of academy trusts) into the Sector Annual Report and Accounts (SARA)”.
        In other words it’s purely an accounting exercise.
        It states that they value each academy’s land and buildings at depreciated replacement cost, which is the equivalent of saying the value of my house it what it would cost to rebuild it if it burnt down. This is palpable nonsense when it comes to private residences and I can completely understand the NAO not being convinced it shows a true value of the land for the same reason.
        Without wanting to sound like a broken record, it is simply not possible to come up with a fair value for the land/buildings that an academy trust ‘owns’.
        Imagine that you own a Ford Focus. It’s open market value is £10,000. However, you can only sell your car to a teacher. And at any point before you sell it I can force you to give it to me for nothing. How much is that car worth to you?

        • Mark – I agree that the valuation appears an inaccurate accounting exercise. The NAO appears to agree.
          Your Ford Focus example is interesting. Presuming I ‘own’ the car but another party has put restrictions on my selling of it. This effectively lowers the value to me to nil. But if the other party takes it over and then sells it, presumably the other party would sell it at market value. So the car would have some value for someone.

          • Mark Watson

            Exactly. The point I’m making is that clearly the land does have intrinsic value, but what value does it have to the academy trust? (Which of course might not be the “someone” in your comment above)
            If a school based in Central London was ‘allowed’ to sell some unused land and keep the proceeds it could be worth millions – many, many times the depreciated replacement cost (which could even be zero if there were no buildings on it). On the other hand the DfE could refuse consent, exercise its prerogative to purchase the land for £0, or exercise its right under the Supplemental Funding Agreement to force the school to share the land with another academy trust. So in practice the land is worth millions, or zero, and anywhere between.
            Hence why I don’t see it being physically possible to put a reliable value on land held by academy trusts, at least what you, I, or anyone else who’s not an accountant would consider a ‘reliable value’.