Academy Related Party Transactions

From 1 April 2019, academies will be required to comply with additional requirements to declare, and in some instances receive approval from ESFA before a related party transaction takes place.

The requirements were included in the 2018 Academies’ Financial Handbook, and ESFA has now issued guidance regarding implementation. The requirements relate to new agreements made with related parties on or after 1 April 2019. The requirements do not apply to income received from a related party, ESFA intends to review its approach to these transactions prior to 1 September 2019.

The new guidelines have two requirements:

Firstly, before to entering into a new agreement with a related party, Academies must inform ESFA of their intention;

Secondly, where the agreement is for

  • A single contract or agreement in excess of £20,000; or
  • A contract or agreement of any value where the total value of contracts and agreements with that related party is in excess of £20,000 in the financial year;

The Trust must obtain permission from ESFA before entering into the contract or agreement.

Trusts should complete an online form which is found within their IDAMS account, in order to notify or obtain approval from ESFA. The online form must be completed in one step, as it cannot be saved and updated at a later point. Trusts will be required to enter details of their supplier, including name, address and Company Number. They will also be required to confirm that an ‘at cost’ assurance statement has been received from the supplier, who must be included within the Trust’s register of interests. Trusts will need to provide evidence of the following:

  • How the related party transaction was agreed;
  • That the Trust’s procurement policy was followed;
  • That the Trust tested the wider market before choosing a related party supplier; and
  • How conflicts of interests have been managed.

A copy of the agreement or proposed contract must also be submitted.

If sufficient evidence and information have been provided, ESFA will make an approval decision within 10 working days. We recommend that approval is sought as early as possible to avoid any delays in receiving goods or services.

ESFA note that where faith schools receive services which can only be delivered by the Diocese and the services provided relate to functions which are ‘fundamental to the religious character and ethos of the school’, these services are deemed to be ‘at cost’ and whilst they should be declared to ESFA, prior approval is not required.

The new requirements seek to provide transparency over an area which has continued to cause controversy and make headlines. It’s more important than ever for Trusts to ensure that the Register of Business and Pecuniary Interests is always up to date, and that policies and procedures are followed, with documentation retained to evidence this.

If you would like to find out how we can support your Trust in meeting ESFA requirements, please contact the following specialists:

Brian Laidlaw Business Services Partner 0191 285 0321 brian.laidlaw@taitwalker.co.uk

Beth Ramsden Business Services Manager 0191 285 0321 beth.ramsden@taitwalker.co.uk

ESFA Auditors Conference September 2018

Our Academies team share their experience at the recent ESFA Auditors Conference…

We attended the ESFA Auditors Conference at the Birmingham N.E.C. We heard about ESFA’s areas of focus and concern as we approach another academy audit season.

Key points from the conference

  • A key message throughout the conference was that of trust accountability. Keynote speeches by ESFA CEO, Eileen Milner and Lord Agnew, Parliamentary Under Secretary of State of the School System, noted the expectation that trusts would ‘account for every penny.’ They also reiterated the need for financial accountability to sit alongside good educational results.
  • The conference addressed the increasing responsibilities of trust board. ESFA made clear their expectation of strong governance at all trusts and that they expect this to prevent financial failure. Boards are encourage to challenge academy leadership teams and hold them accountable.
  • A number of speakers noted the importance of trusts addressing all points raised in the management letter. ESFA expects all trusts to take swift action to address points raised, and would consider any points not addressed to be a ‘red flag.’ The 2017/18 AAR will require trusts to declare the number of management letter points raised during the audit and how many points from prior years’ management letters have not been addressed.
  • ESFA consider internal assurance findings to be as important as the points raised in management letters. There is also an expectation that trusts will swiftly address these points.
  • ESFA clarified their stance in respect of trust’s purchasing alcohol – an area that has long been contentious, and confirmed that they do not expect this to take place under any circumstances.
  • Reports of compliance across the academy sector were generally good. 93.7% of 2017 financial statements were submitted on time, along with 92% of AAR’s. However, ESFA would like to see this increase further. ESFA will be ‘naming and shaming’ non-compliant trusts on an annual basis.
  • Lord Agnew was keen to emphasize that well run trusts, with good governance in place, and good exam results will face little interference from ESFA.

If you have any queries, please contact Beth Ramsden.

The 2017-18 Academy Accounts Direction has now been published by ESFA

ESFA has published the 2017-18 Academy Accounts Direction. There are no wholesale changes to the accounts, but there are a number of areas where additional disclosures or detail is required for the 2017/18 accounts:

Trustees’ Report

  • The trustees’ report now requires an additional disclosure for all trusts with more than 49 FTE employees in any 7 month period within the accounting period in order to comply with the Trade Union (Facility Time Publication Requirements) Regulations 2017. The following information should be disclosed:
    • Number of employees who were relevant union officials during the period (both headcount and on FTE basis);
    • Details of the proportion of time spent by employees on union business (facility time);
    • The cost to the academy for this facility time expressed as a % of the academy trust’s total pay bill; and
    • The percentage of time employees spend undertaking paid trade union activities as a proportion of the total paid facility time.
  • Details of the Academy Trust’s fundraising practices including:
    • Approach to fundraising;
    • Work with and oversight of any commercial participators / professional fundraisers;
    • Fundraising confirming to recognised standards;
    • Monitoring of fund raising carried out on its behalf;
    • Fundraising complaints; and
    • Protection of the public, including vulnerable people, from unreasonably intrusive or persistent fundraising approaches, and undue pressure to donate.

Accounts Disclosures

  • Academy Trusts will be required to split out expenditure on raising funds between direct and support costs incurred in the relevant note to the accounts.
  • The funds and net assets notes will be expanded to show full details of the preceding period, where the academy trust’s current and prior periods are 12 months.
  • Capital income relating to assets not included within the academy trust’s balance sheet should be recognised as a donation. The relevant expenditure should be recorded either as grant expenditure in the SOFA, or capitalised as site improvements with the balance sheet.
  • The fixed asset note is expanded to show assets under construction as a separate category. In addition, fixed asset additions and fixed asset acquisitions are now categorised separately within the fixed asset note to allow for additional clarity.
  • The related party note requires transactions with related parties to distinguish between income and expenditure transactions. Disclosure in relation to any expenditure to related parties should confirm that the academy has complied with the Financial Handbook and Financial Procedures Manual in relation to the transactions, that they have been undertaken at arm’s length and that any expenditure in excess of £2,500 has been incurred at cost, with a statement of assurance obtained from the related party to confirm this.
  • In addition, the related party note in consolidated accounts must disclose all transactions between the Academy Trust and its subsidiaries. The exemptions within Section 33.1a of FRS102 cannot be applied by Academy Trusts.
  • A full income and expenditure statement is required in respect of teaching school income and expenditure within the notes to the accounts

Regularity

ESFA has consistently identified issues in the following areas:

  • Lack of approval for finance leases
  • No statement of assurance for connected party transactions
  • Connected party transactions not at cost
  • Non-contractual severance payments made without the required approvals
  • Weak internal controls

ESFA has specifically noted the provision of excessive gifts or purchase of alcohol as irregular expenditure. They would be reported as a breach of regularity if purchased.

Your auditor should ensure that audit work undertaken provides assurance that they Academy Trust has complied with ESFA requirements.

ESFA must receive submitted accounts within four months of the accounting period end. For academy trusts with an August year end, the filing deadline remains 31 December. However, when an academy trust becomes inactive at an earlier date, i.e. the final academy has closed out of the trust, the filing deadline will move forward accordingly.

If you have any queries or require further assistance, please contact Brian Laidlaw or Beth Ramsden from our Academies team.

Fraud prevention for academies

There have been numerous recent cases where schools have been the subject of targeted fraud attempts. Fraudsters often pose as the Principal, or other individuals in authority, requesting payments for finance staff. Schools are an easy target as there tends to be a lot of information on academy websites. They often detail the roles of individuals, such as the Senior Leadership Team and Governors, often including e-mail addresses. The press may publicise large capital projects, such as a new building. This alerts fraudsters of large planned payments and provides the opportunity for supplier payments fraud.

The Charity Commission has recently published guidance on tackling fraud and many of the recommendations apply to Academy Trusts.

Fraud prevention starts with good governance. It is important for Governors to understand where the risks are in the organisation and put mitigation plans in place. The Governors must be seen as being committed to ensuring robust fraud defences are in place so that this becomes the culture throughout the school.

Cybercrime

With respect to cybercrime, improving passwords can mitigate most cyber threats. The list of the top ten passwords used still contains ‘Password’ and ‘123456’! With the impact of GDPR, the loss of data will have increasingly serious financial consequences. This is in addition to the reputational damage caused. The Trust should have a password policy in place and the IT department should monitor passwords to ensure staff compliance. Individuals should change their passports regularly and receive appropriate guidance.

The use of social engineering in banking frauds often establishes the victim’s trust. The fraudster gathers information about the Trust and the staff from websites and social media. They then use this to gather additional information which can then be used to access bank accounts or persuade a member of staff to make payments. They often suggest that there is an element of urgency in their requests. Staff should know the risks so that they are wary of requests for information or urgent payments. Staff should also be careful of what e-mail attachments they open, as these can contain malware.

Supplier Payment Amendments

In relation to supplier payment details, a procedure should be in place for changing the bank details of suppliers so that any requests are verified directly with a known contact at the supplier and evidenced in writing.

Internal Finance Systems and Procedures

In addition to the risk of fraud from individuals outside the Trust, there is also a risk of internal fraud. Governors need to ensure that robust finance systems and procedures are in place in order to minimise the risks of fraud.

There should be an effective way for staff to report suspected or known fraud so that any concerns are addressed as soon as possible. The Trust should have a fraud prevention and whistleblowing policy in place so that staff know how to report and deal with concerns. Fraud awareness should form part of the staff induction and ongoing training. The majority of staff in the Trust will have some involvement in the management of school funds, whether through ordering goods, managing budgets or organising school trips, and fraud can occur in any area.

If you have any questions or would like to discuss fraud prevention with us in more detail, please contact our team on 0191 285 0321.

This article originally appeared on the blog of fellow MHA member firm, MHA Moore & Smalley.