In recent years the academy regime has come under increasing scrutiny with newspaper reports of financial mismanagement, inappropriate use of public funds and news of individuals benefitting personally from the academy trusts that they are charged with protecting. This, coupled with a renewed political interest in the sector means that academy trusts should take the opportunity to consider what exposure they have to similar publicity.
Many of the publicised scandals show that one area that is often endemic throughout is the mismanagement of related party relationships and transactions. Interestingly, some of the recent public failures have arisen from what appear to start with genuine bona fide arrangements only for that arrangement to develop into something less palatable and in conflict with the Academies Financial Handbook 2018 (AFH).
Academy trusts need to be able to identify and document related party relationships at all levels throughout the organisation, not least because the public is unlikely to be sympathetic to a dubious related party transaction even if it was carried out unintentionally. There is another reason to revisit your related party arrangements. From 1 April 2019, the AFH requires academy trusts to disclose all related party transactions to the Education and Skills Funding Agency (ESFA) in advance of the transaction taking place.
In addition, transactions exceeding £20,000 (either individually or in aggregate), with the same related party, will require approval from ESFA before the transaction can be entered into. A straight forward requirement perhaps. But there are some pertinent questions that academy trusts should consider before the 1 April 2019 deadline which is now less than three months away.
Related parties for the purpose of reporting them to the ESFA are those that fall within the definition of the Charity SORP (FRS 102) and AFH and broadly include:
Capturing related party arrangements should start at the induction process. The induction of new members and Trustees should include a process to capture full disclosure of pecuniary and business interests for the individual and for their close family members. We believe that academy trusts should encourage individuals to declare all known pecuniary and business interests and not just those that the individual considers to be relevant to the academy trust. This should be an ongoing process which is undertaken on an annual basis.
It is important that these declarations do not simply get filed away never to be seen again. They should be collated and included on a central register so that finance teams are able to identify a potential related party before inadvertently transacting with one.
With the new approval limits for related party transactions
there is likely to be a focus on the process that has been followed when
entering into, and managing such arrangements. As such academy trusts should
assess why, and how, they need to transact with a related party. Many related
party arrangements arise because there is a perceived cost advantage (because a
Trustee may offer a significant reduction on the normal commercial terms) but
this should not be the only factor in choosing to transact with a related party
over a regular supplier. The board should ensure it fully documents and minutes
its decision to enter into the transaction to ensure transparency.
The trust must also ensure that the ‘at cost’ principles are
still applied. A related party must not make any profit on the transaction and
Trustees should ensure that they have undertaken sufficient enquiries
(including a written confirmation from the Trustee) that the transaction is at,
or below cost, before entering into the transaction.
There should also be a mechanism to enable board members to
declare any conflicts of interest at board meetings when a contract is being
awarded or discussed at that meeting. Where this is the case the individual should
leave the meeting until the matter is concluded.
Guidance on the new arrangements is due to be released
before the 1 April 2019 deadline. But we have summarised below the pertinent
matters that we believe you should prepare for.
With the spotlight now firmly an academies and their related
parties, it is as important as ever for academy trusts to manage related
parties effectively and transparently. An increasing number of academy trusts
are now avoiding the use of related parties and their businesses as a way to
manage the reputational risks that may result.
For those academy trusts that continue to see the benefits
of using related parties, the related party principles are not always straight
forward and can sometimes require a judgment in applying the principles of SORP
If you are unsure whether you need to disclose a potential related
party transaction to the ESFA then please contact Matt Doyle-Healey, Senior Audit Manager or Helen Drew, Partner, Audit on 0121 543 1900.