In Part 1 we examined the purpose of due diligence when a school joins an academy trust. In this Part 2 we look at workforce aspects and financial due diligence.
Payroll costs typically account for 75-80% of a schools’ expenditure (DfE, 2013) so this is obviously an area to pay careful attention to. When a school joins a MAT, normally the MAT is the legal entity which will become the employer of the staff. In a community school, the existing employer will usually be the local authority and so the HR department of the authority will have a key role to play in providing information about the workforce and smoothing the transition. However, in voluntary aided schools it is usually the governing body that is the employer. Even in some maintained schools, the governing body may be the legal employer of certain staff (e.g. premises assistants, community workers, nursery staff). This is a trap to watch out for since it is the existing employer that has legal duties to comply with.
The new joiner school will want to understand what will happen to its staff when they join the group. Under the new structure, who will have the power to suspend staff, appoint performance management reviewers, undertake threshold assessment or exclude pupils?
The MAT, on the other hand, will be interested in the profile of the staff it will be taking on, and the associated payroll costs and liabilities. The transfer of teaching and support staff will be covered by the Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’) and the contractual terms of the Commercial Transfer Agreement (CTA). The practical effect of this is threefold:
- The new employer inherits the contracts and payroll costs (including pension entitlements) of the staff who transfer; the ability to make changes to employment contracts or release staff is very limited and requires specialist advice.
- The current employer and new employer need to inform staff and consult with them about the transfer arrangements – failure to do so can result in a financial penalty.
- Any existing grievances or claims relating to the staff transfer to the new employer and become their problem to manage.
Remember that TUPE can also apply to staff employed by external contractors. So, if the joining school has a contract for maintenance or cleaning with an outside provider with staff who spend most of their time servicing that location, and the intention is that these functions will in future be performed in-house by the MAT, these staff may also end up transferring onto the MAT payroll as well.
Some key questions to probe:
- Obtain an organisation chart and biographies of key staff. Check historical and projected headcount. Any recent changes of leadership or restructuring?
- Details of all staff, including date of birth, age, date of starting employment, length of service, salary, benefits, notice period, pension details.
- Are appropriate contracts in place for all staff? Arrange to review a sample. Any consultants or self-employed contractors who regularly provide services?
- Have any verbal assurances or agreements been made with staff outside of their formal contract?
- Are personnel records up to date and securely stored? Will they be handed over on the transfer date?
- Are payroll records up to date and complete? Have all necessary deductions been made and accounted for to HMRC and others? Do the figures tally with the contractual entitlements?
- What are the figures for staff turnover? Are there any pending disciplinary or grievance investigations? Have any staff been dismissed recently?
- Details of sickness records, employees on maternity leave or secondment.
- How will occupational health support be provided in future?
- How will absence management be dealt with post-transfer?
Both the new joiner and the MAT will have a range of stakeholders whose views and attitudes can shape the future success of the integrated organisation. These will include parents and carers, pupils, former pupils, the staff, the local authority, external sponsors or foundations (such as the local diocese in the case of religious schools), local residents, local media, the Regional Schools Commissioner. It is important to map out these stakeholders, solicit their views and decide how best to consult with them and keep them informed about future plans. What are their hopes, fears and dreams for the future? A stakeholder communication plan should be drawn up. Digital communications and social media could play an important role in doing this cost-effectively. Surveys, press reports and Google searches may produce useful insights.
Financial due diligence should determine the current financial position, as well as identifying any support or training needed for managers going forward. New joiners will need to understand how the ‘top slice’ deduction to their school budget to pay for central support services will be applied and whether it represents value for money. Typical rates can vary from 3% to 5%, in some cases even 7%. Are the service levels to be expected from central support services in return for this deduction clearly documented?
Typical areas requiring examination will include:
- Income/ Expenditure Budget reports and cashflow projections
- Summary of month end bank and cash book position for current year and last two years, explanation of variances and major inflows/ outflows
- Five-year financial forecast for the school. Are assumptions realistic? Particularly with respect to pupil numbers, which is ultimately the key financial driver.
- Any negative balances, deficits or outstanding loans (e.g. for capital projects funded by local authority, Priority Schools Building Programme or Targeted Basic Need)?
- Any grant funding with restrictive conditions or claw-back provisions (e.g. for sports facilities)?
- Details of revenue generating activities – e.g. room or outdoor space hire, paid-for services.
- Any significant debtor balances?
- Any significant off balance sheet liabilities (e.g photocopier leases or vehicle leases)?
- Any VAT or corporation tax issues?
- Any pension fund deficit?
- How is payroll currently organised? Do all staff have up to date contracts?
- How is banking currently organised? Who are the signatories on accounts?
- What are the financial controls and checks?
- What are the main risks facing the organisation? Are these documented in a risk register?
- Discussions with the relevant section of the Local Government Pension Scheme should take place early in the process to find out their methodology regarding transfer values, which will have an effect on future employer contribution rates.
- What accounting systems and current reporting arrangements are in place?
- The new joiner will be keen to see the last 3 years’ audited accounts for the MAT and the auditors’ management letters
The most common areas of fraud in academies identified by the National Audit Office (2015) were:
- Inappropriate expenses claims or undocumented salary increases
- Inappropriate or unauthorised purchases (e.g. luxury goods, alcohol, cars)
- Non-compliance with procurement and tendering rules for major purchases or building projects
- Related party transactions (i.e. buying from business connected with management or governors)
Next time – In Part 3 of this post, we will look at commercial and asset-related issues of due diligence for schools joining an academy trust.
Find out more about our Due Diligence Service here.
Mark Johnson is a highly experienced independent solicitor & chartered company secretary helping schools and academies with conversions, creation of MATs, legal and governance issues. We can help your academy to flourish. Find out more at elderflowerlegal.co.uk.
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