Academy building
Academies: managing related parties
Be prepared
Matt Doyle-Healey, Senior Manager, Audit
30/01/2019
Academy building

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.

 

Who are your related parties?

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:

  • sponsors (that can exert control)
  • any member or Trustee of the academy trust
  • any individual or body that has the right to appoint a member or Trustee
  • any close family members of a member or Trustee
  • any person carrying on a business or partnership with a member or Trustee
  • any organisation connected to a member or trustee(an organisation is connected if the individual holds more than 20% of the voting right or shares of the entity).
How effective are you at capturing related party transactions?

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.

How do you manage related party arrangements?

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.           

The new requirements

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.

  • The new requirements will only apply to related party transactions that have been entered into, or committed to after 1 April 2019. Agreements with related parties that are already in existence at 1 April 2019 will fall into the new regime upon renewal of the agreement. It is important that academy trusts have a clear policy on when agreements are revisited. There is no hard and fast rule on this but it may be more difficult to justify that an agreement continues to be value for money unless it is reviewed at least every two years, and preferably on an annual basis.
  • Academy trusts should remain alert to any amendments to an agreement that could take the transaction over the £20,000 limit as this would then require prior approval.
  • In obtaining approval, academy trusts will need to demonstrate that the transaction has been entered into in line with usual procurement procedures, that conflicts of interest have been appropriately managed and that the transaction has been benchmarked against external suppliers if necessary.
  • The AFH provides an exemption for reporting related party transactions that relate to salaries as part of a contract of employment. At face value this appears to exclude the need to report Trustee remuneration and salaries paid to other related parties. However the SORP requires disclosure of employment contracts with Trustees or other related parties and so these type of transactions may also be caught in the new regime. This is expected to be clarified in the next version of the AFH, and in the new regime guidance due to be released shortly.
  • We do not believe that contracts of employment with related parties entered into before 1 April 2019 will fall within the regime.
  • There is likely to be a delay in applying for approval and actually receiving it. Therefore academy trusts are advised to plan ahead to avoid delays in more urgent spending
  • At the time of writing, we do not believe incoming related party transactions will fall within the regime as it is not these type of transactions that pose risk. Occasionally academy trusts may pay a notional amount (for example, in return for sponsor support that far outweighs the cost to the academy trust). The amount paid will still fall within the regime for reporting.
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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 (FRS 102).

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. 

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Helen Drew
Helen Drew
Partner, Audit
Midlands