"Academy schools' accounts highlight potential risks to pupils and taxpayers" says PAC

REPORT SUMMARY

Academy trusts are educating increasing numbers of children and handling large amounts of public money. The cost to pupils and the taxpayer of failure are particularly high for multi-academy trusts.

It is therefore crucial that they show the highest standards of governance, accountability and financial management.

Too often academy trusts are falling short of these standards and the Department for Education is too slow to react.

The publication of the first Academies Sector Annual Report and Accounts is a welcome step forward in improving transparency and accountability in the sector. Yet the report was not published until nearly fourteen months after the end of academies’ financial year. 

The Department now needs to make the Annual Report and Accounts more timely so that it can be used more effectively by stakeholders, including Parliament and parents, to hold the Department and academy trusts to account.

COMMENT FROM PAC CHAIR MEG HILLIER MP

“More than two million pupils are taught by academies in England. The governance and financial management of these schools is fundamentally important to pupils’ educational outcomes and future life prospects.

“If parents, Parliament and others are to hold them properly to account, it is vital they have timely access to transparent and detailed information. Academies and the trusts that run them must be judged against the standards expected of other schools funded by the taxpayer. 

“The cost of failure where an academy chain runs several schools is hugely damaging for pupils and Government needs a better grip of when chains are at risk of failure.

“We also see too often a disregard for financial probity in related party transactions.

“Publication of the sector’s annual report and accounts is a step in the right direction. But this information would have more practical value were it to be published quicker and with more comparative detail.

“The Government has made a clear commitment to provide the 2016/17 account in October this year, and subsequent academy accounts prior to Parliament’s summer recess, and we expect it to honour that. 

“But the Department for Education must also address concerns arising from the accounts published to date.

“Excessive trustee salaries deprive the frontline of vital funds and it is alarming that, in two-thirds of cases where Government has challenged individual trusts on pay exceeding £150,000, it has not been satisfied by the response.

“The Department for Education must assert its authority in this area as part of a more proactive strategy to safeguard pupils’ education and public money across the sector.

“That means identifying more quickly trusts at risk of financial difficulty, enabling it to intervene effectively.

“It must also demonstrate it has a coherent plan to protect schools’ assets and pupils’ interests should a multi-academy trust fail.”

CONCLUSIONS AND RECOMMENDATIONS

The Department’s rules around related party transactions are too weak to prevent abuse. A related party transaction is a business arrangement between an academy trust and an organisation or a person with whom those responsible for the governance of an academy trust have a personal connection. The Education and Skills Funding Agency (ESFA) requires any such transactions to be disclosed in the academy trust’s accounts. The total number and value of these disclosures is published in the sector accounts. During the year ending 31 August 2016, 40% of academy trusts engaged in related party transactions, worth a total of £120 million. The Department told us that related party transactions can be beneficial to academy trusts, for example, where a trustee provides goods and services free or at a reduced cost. We are not convinced that this is always the case. The Department requires that the price paid by the academy trust should only cover the cost of providing the service and it explicitly prohibits instances where related party transactions are carried out for profit. Working out what constitutes the cost of providing a service can be complex and open to manipulation. It is therefore difficult to prove that a related party transaction for services is not “at cost”. The ESFA is not required to approve related party transactions, which means that, in most cases, the ESFA only becomes aware of potential issues when it receives the trust’s accounts at the end of the year. We are concerned that the rules are difficult to police, as the Department’s processes are not robust enough to prevent abuse and that such abuses only come to light after the fact, often as a result of the year-end audit, or whistle blowing. These arrangements between academy trusts and related parties should arise by exception, rather than with the current frequency.

Recommendation: To prevent abuse, the Department should tighten the rules in the next version of the Academies Financial Handbook, expected in July 2018, to prevent academies from entering into related party transactions without approval from the ESFA. 

The accounts would better support transparency and accountability if they included more detailed analysis. The Academy School Sector Consolidated Accounts 2015/16 includes some high-level performance information on the academies sector. While this provides an overview of the sector, the accounts do not currently contain comparative analysis of the performance of trusts of different sizes or geographical locations. Such analysis, along with comparators and benchmarks, would make it easier to assess performance across the academies sector. The information that is currently available on the relative performance of academy trusts is not sufficient to enable parents and local communities to hold academy trusts fully accountable for how they spend taxpayers’ money. The 2016/17 report will not be published until October 2018 due to the additional work needed to address the issues around how academy trusts account for land and buildings. We were pleased to hear that the Department has committed to preparing and publishing subsequent accounts prior to Parliament’s summer recess.

Recommendation: The Department should publish more analysis in the accounts for 2016/17, including a comparison of the performance of academy trusts of different sizes and geographical areas.

Some academy trusts appear to be using public money to pay excessive salaries. The Annual Report and Accounts showed that there were 102 instances of trustees being paid salaries which were excess of £150,000 in 2015/16. In November 2017, the ESFA wrote to 29 Single Academy Trusts where a Trustee was paid in excess of £150,000, requesting justification for these significant salaries. The ESFA has received responses from all 29 trusts, but in two thirds of the cases is not yet satisfied with the trust’s response. Unjustifiably high salaries use public money that could be better spent on improving children’s education and supporting frontline teaching staff, and do not represent value for money. If the payment of such high salaries remains unchallenged, it is more likely that such high salaries become accepted as indicative of the market rate. This could then distort the employment market in the sector for senior staff. Staff costs represent a substantial proportion of a school’s costs already (over 70%), so large increases in salaries, when overall funding is not increasing at the same rate add to the financial pressures faced by schools.  

Recommendation: The Department should extend its work to challenge all academy trusts that are paying excessive salaries and take action where these cannot be justified.  The Department should write to the Committee and update us on the results of this work.

With the growing financial pressures on schools, the Department is not doing enough to identify academy trusts that are at risk of getting into financial difficulty. The Annual Report and Accounts show that 165 (5.5%) of trusts were in deficit in August 2016, the latest date for which data is publicly available. The ESFA told us that it is confident that it has an up-to-date picture of schools facing financial difficulties, based on its review of academy trusts’ accounts and budget forecasts. It also carries out risk assessments designed to identify trusts at risk of financial difficulties. These are designed to identify when the resources given to a trust are not being managed in a proper and effective manner. We were concerned that, despite this, the Department could not tell us how many trusts were currently in deficit, and that it did not expect to have this information until October 2018. This uncertainty, and the lack of up to date information, does not instil confidence in the effectiveness of the ESFA’s financial monitoring and its timely intervention to support schools at risk of getting into financial difficulty.

Recommendation: The Department should, by the end of June 2018, write to the Committee with details of its progress in improving how it identifies, and intervenes with, academy trusts at risk of financial difficulty.

The Department could not clearly explain how it protects schools’ funds and assets when a Multi Academy Trust fails. In July 2016, 3,636 (63%) academies were part of a Multi Academy Trust (trusts which run more than one school). The Department saw no issue in principle with individual trusts running a large number of academies, but acknowledged that in the past academy trusts had been allowed to grow too big too fast. The Department told us that it did not consider any Multi Academy Trust to be too big to fail. It asserted that, when failure occurs, it takes appropriate action. We asked whether schools which had transferred a surplus to Multi Academy Trust upon becoming an academy would get their money back if the trust were to fail. The Department was unable to explain on what basis funds and assets were allocated between schools when a trust failed. We are concerned about the impact of the failure of a trust on pupils – the consequences are more severe and the solutions more challenging than when a single school fails.

Recommendation: The Department should write to the Committee by the end of June 2018 with detail of how funds and assets will be protected and redistributed when schools transfer to another academy trust after one has failed. The Department needs to develop a risk strategy for how to tackle multi-academy trust failure.

The Department does not have enough information about the extent of asbestos in schools to ensure that the risks are being properly managed. Asbestos is a significant, and potentially dangerous, problem in many schools. In April 2017, we found that the Department did not have a complete picture of the extent of asbestos in school buildings. The Department’s first property data survey did not assess the extent of asbestos.  Only a quarter of schools responded to its second survey, in 2016, which aimed to collect data on this issue. We recommended that the Department should set out a plan by December 2017 for how it would fill gaps in its knowledge about the school estate in areas not covered by the property data survey. The Department’s latest property data survey is currently taking place and will provide more information on the presence and management of asbestos. The Department accepted that information on asbestos in school buildings should be available locally and easily accessible to parents and local communities. ESFA told us that it expected information on asbestos to be available locally for parents to view, and without recourse to Freedom of Information requests. We were concerned to hear of an example where this had not been the case and local communities could not easily access this information.

Recommendation: The Department should publish the results of its ongoing exercise to collect data on asbestos; and make clear to Local Authorities and academy trusts that information should be made available by the end of June 2018.