Relentless Focus on Good Governance in Academies Continues

Good Governance in Academies is Key Focus for DfE

Over the Summer the Department for Education quietly published some documents which show the focus on good governance in academies remains a key priority. The first document was the widely expected new edition of the Academies Financial Handbook which applies from 1 September. Secondly, the Education and Skills Funding Agency (the new name for the EFA) published three financial management and governance reviews into multi academy trusts. These highlight case studies of where things can go wrong. In case you missed them, here we summarise the key points to be aware of.

Academies Financial Handbook

It is a requirement of all Academy Trusts’ Funding Agreements that the Academies Financial Handbook (’AFH’) is complied with, in particular the list of ‘must haves’ in Annex C. The new AFH applies as from 1 September 2017. The main changes in this new edition concern governance and financial control.

Governance

  • There is an emphasis on greater clarity about the roles of members, trustees and salaried employees

There must be clear separation between the roles of member, trustees and executive (paid) managers. For example, employees of the Trust must not be appointed as members, unless permitted by the Articles of Association. The current model articles do not allow members to be employees, but some older versions do. Trusts with older articles may wish to consider revising their articles to reflect best practice.

In addition, the DfE’s preference is that no other employees, other than the Senior Executive Leader, should serve as a trustee. This helps to ensure there are clear lines of accountability through the Senior Executive Leader. Older Articles may talk about no more than one third of trustees being employees. Again, Trusts may wish to adopt this change in line with best practice.

  • Trusts are reminded that the overarching seven Nolan principles of public life apply to everyone holding office in an Academy trust (selflessness, integrity, objectivity, accountability, openness, honesty and leadership).
  • Annual letters to Trusts’ Accounting Officers/CEOs from the ESFA’s accounting officer must be discussed by the Board and appropriate action taken

The ESFA sends letters to Trusts’ Accounting Officers/CEOs from time to time which cover issues pertinent to their role and ESFA reviews. The letter must now be shared with members, trustees, Chief Financial Officer and other members of the senior leadership team. It must be discussed by the Board of trustees.  This discussion should be clearly documented in the Trust board minutes. All “Dear Accounting Officer” letters can be found on the DfE website here.

  • Improving efficiency and value for money in academy trusts

Where the ESFA have concerns about a Trust’s financial management, but not enough to issue a Financial Notice to Improve (FNtI), they may require the Trust to work with an expert in school financial health and efficiency to support the Trust and identify where improvements can be made. They may also prescribe this as a condition of a FNtI.

  • There is an emphasis on the importance of addressing skills gaps on the Board at key transition points such as growth periods. Trusts are recommended to use the DfE’s competency framework for governance to determine skills gaps in the Board (see more here)
  • Trusts should consider the key features of effective governance in the DfE’s Governance Handbook when assessing their effectiveness

Boards should be looking to implement these as part of their annual assessment of their effectiveness and skill-set, as well as minuting these discussions.

  • Edubase must be kept up to date with details of changes to Trustees and members within 14 days

Recent ESFA reports have highlighted that some Trusts are not keeping their records up to date of who are members and trustees promptly following either appointments or resignations. This applies to both Edubase and Companies House records. Someone should be given specific responsibility to complete this task, usually the Company Secretary.

  • Appointment of auditors must be approved by the members, not just the trustees

The Board of trustees may believe they are responsible for the appointment of auditors. However, this is only the case where the Companies Act permits trustees to appoint them e.g. in the Trust’s first accounting period. Thereafter the members must approve the appointment, usually at an AGM.

Financial Control

  • a new section on executive pay states that Boards must ensure their decisions on levels of pay follow a robust evidence-based process and reflect the roles and responsibilities of individuals

The decisions should be backed up with supporting evidence and secure records kept–such as confidential appendices to minutes.

  • Repercussive transactions’ as well as ‘novel or contentious transactions’ now require ESFA approval

Repercussive transactions are those which are likely to cause pressure on other trusts to take a similar approach and hence have wider financial implications for the academies sector.

  • Clarification that the non-statutory/non-contractual element of a severance payment limit of £50,000 is based on the gross amount before any deductions for tax etc.

This is a welcome technical clarification. The full new Handbook can be viewed here.

Financial Management and Governance Reviews

The ESFA can initiate a Financial Management and Governance review at an academy trust following a complaint, or on its own initiative, either at random or as part of its new routine assurance activities. There have been 25 such reviews conducted since 2013. The typical remit of a review is:

  • to assess the financial controls and management in a Trust to see if they are compliant with the AFH and Funding Agreement
  • to assess the adequacy and effectiveness of governance, risk management and internal controls
  • to assess propriety, regularity and value for money

The ESFA’s policy is to publish their findings to inform public debate and scrutiny. The academy trust is usually given 5 working days to comment on the report before it is published. Three such reports were published over the Summer.

The first review concerns the DRB Ignite MAT. The review was instigated following a complaint about a leasing arrangement for whiteboards at one of their schools. However, the remit soon expanded to cover scrutiny of wider governance arrangements in the MAT.  The key findings of the review were:

  • There was a lack of separation of the roles of members, trustees and executive managers. The Accounting officer was a member as well as being a director. The Accounting Officer was not on the Trust’s payroll and the role had rotated among the directors three times. There was no written agreement in place setting out the role and responsibilities of the Accounting officer – in breach of the Academies Financial Handbook. The AFH requires that the role be allocated to a Single Executive Leader, who is accountable for the use of public money. The CFO role was contracted out to another group company and the Trust board did not have any independent directors with accountancy experience or qualifications. This created a risk of inadequate oversight and challenge. The named member of the trust was a company which had since become dormant, thereby breaching the Articles of Association.
  • The trust was using related commercial companies and connected parties to provide 83% of its central functions and expenditure without following a proper procurement process. Remember that delivery of services by related parties can only be ‘at cost’ (see below) and a contract for services or goods may need to advertised and comply with EU procurement rules if over a threshold of £164,176 (unless it can be argued that by their nature the services fall under the Light Touch Regime in which case a higher threshold of £589,148 may apply). The ESFA was not satisfied that adequate procedures were in place to manage conflicts of interest between the Trust and connected companies. The same people sat on the Trust board and the boards of group companies providing the services. Directors were approving invoices from their own group companies for payment. This was potentially a breach of Companies Act duties and charity law, as well as the AFH.
  • The award of a contract for smartboards at one of the trust’s primary schools to a group company did not follow best practice and could not demonstrate value for money
  • The trust had failed to keep EduBase updated with details of members and trustees within 14 days.
  • There was no central of register of contracts, making it difficult to coordinate the re-tendering to drive value for money
  • There was a failure to publish details of business and pecuniary interests of trustees on the website and failure to keep adequate minutes of trustee meetings.

The Trust was ordered to undertake a review of its governance arrangements and carry out urgent corrective actions.

The second review was published on 28 June and concerned the Rodillian MAT. The investigation was triggered by complaints about the Accounting Officer staying at a luxury hotel several nights a week, despite living within travelling distance of the schools. The review quickly broadened in scope and found other issues which are documented in the ESFA report:

  • The Accounting Officer had been reimbursed for hotel accommodation – although there was no policy on approved subsistence and travel in place to measure the reasonableness of this and no evidence of Board approval for the expenditure
  • The trust had rented a flat for the Accounting Officer – although the benefit was not documented – this should have been regarded as a novel or contentious payment and ‘ex gratia’ benefit for which ESFA approval was required
  • The Trust had awarded a contract worth £1.45m for alternative education for students excluded from mainstream provision without following a competitive tendering procedure. Although the contract was for 5 years, the liability in the accounts was only shown as a 3 year commitment.
  • The Trust did not have an up to date financial procedures manual in place
  • There were no proper procedures for authorising payments to suppliers
  • The Trust had entered into supposed ‘operating leases’ of smart boards which were in fact ‘finance leases’ (which require prior approval from ESFA).
  • The Trust Chair was paid for consultancy services – as the Chair was also a member this is not allowed and would have required prior consent from the Charity Commission.

The third review concerned Enquire Learning Trust. According to the report, similar themes came to light:

  • Senior managers were employed ‘off payroll’ through limited companies
  • There was lack of skills and oversight of managers by the Trust Board
  • The role and responsibilities of the Accounting Officer were not documented in a contract
  • The financial reports presented to the board were inadequate and did not give trustees a picture of the overall consolidated financial position of the trust. There was no 3-5 year consolidated forecast.
  • Two significant related party transactions in 2015/16 were not disclosed
  • Financial controls over purchasing, including the use of corporate credit cards were inadequate. The lack of segregation of duties and independent oversight of purchasing and payment arrangements increased the risk of inappropriate expenditure.
  • Trust officers had claimed irregular payments for valuations of trust premises in connection with a scheme to transfer the Trust premises into their personal pension funds and lease it back to the Trust
  • There was no central asset register to keep track of valuable items such as laptops issued to staff
  • There was no audit committee or independent Responsible Officer to carry out assurance checks

Lessons to be learned

A complaint can be triggered by a disgruntled employee or governor – once the process starts it can be very resource intensive to manage and the scope of the inquiry can quickly widen.

  • Understanding the separation of roles between members, trustees and executive managers is absolutely critical. A clear Scheme of Delegation, Code of Conduct, policies and procedures are your first line of defence in demonstrating compliance. Be clear about who your members are and keep the register up to date so it is clear who actually holds the voting rights. Make sure they are involved in relevant key decisions and due process is followed.
  • Remember the ‘at cost’ requirement if awarding contracts to a ‘connected party’. An individual or company can supply good and/or services up to £2,500, cumulatively, in any financial year which can include profit; however, beyond £2,500, all transactions must be ‘at cost’ without profit. Where ‘at cost’ is triggered, a statement of assurance is required from the supplier to support the arrangement, which the Accounting Officer must review to ensure that there are no issues with the transaction. ‘Connected parties’ include members, trustees, sponsors (as well as their family members and business associates).
  • Develop a set of Standing Orders and Financial Regulations which set out the requirements for obtaining competitive quotes, authorisations for expenditure, delegated limits and the limited circumstances in which this can be waived. Remember that contracts with a value in excess of £164,176 may be subject to EU competitive tendering rules.
  • Be very careful about awarding contracts to ‘connected parties’. These will almost always be spotted during the external audit and will be flagged up in your annual accounts attracting further scrutiny. The Articles of Association will usually set out the process which must be followed to properly authorise such a transaction – any trustees with an interest in the contract must declare this and must withdraw from the meeting.
  • Develop a set of policies on subsistence and accommodation expenses, gifts and hospitality so that everyone knows where the boundaries are.
  • “Off payroll arrangements” – whilst there may be the odd time such arrangement is appropriate, for standard roles payments should be on-payroll, which also helps ensure that the individual is meeting their tax obligations.
  • Make sure that novel and contentious issues go to the Board for discussion and that decisions and the justification for them are properly minuted.
  • Understand the difference between finance leases and operating leases . Under an operating lease all risks and rewards related to asset ownership remain with the lessor for the leased asset. In this type of lease, the asset is returned by the lessee after using it for lease term agreed upon. The ownership of the asset remains with the lessor. However, under a finance lease the risks and rewards related to ownership of asset leased are transferred to the lessee. The lessee usually has an option to acquire ownership at the end of the lease by making a further payment. In accounting terms, this is usually treated like a loan.
  • If these Trusts had had an effective Audit Committee providing oversight and challenge, these situations could probably have been avoided. As one review commented: “Audit Committee functions should be established in such a way as to achieve internal scrutiny that delivers objective and independent assurance. Where the Responsible Officer function is provided by [a group company] it cannot be shown to be independent and hence is in breach of the Academies Financial Handbook”. See more on the role of an Audit Committee.
  • It is always good practice to take a step back before entering into any unusual transactions and consider the wider implications. Could this transaction attract adverse media coverage? Is it outside our normal business activity? If we enter into the transaction and another academy trust hears of this, will it impact upon the wider sector? Whilst this  comes down to judgement and perception, it may be safest to consult with ESFA before performing the transaction rather than being criticised later for making the wrong decision.
  • Consider undertaking a governance review facilitated by an external provider to check your house is in order and that you are following best practice. We offer a fixed price service GovernanceCHECK360.

 


Mark Johnson is an independent solicitor and chartered company secretary helping academy trusts, schools, colleges and not for profits to stay compliant, manage risks and plan for success. Contact us today for a no-obligation chat or check out our website at elderflowerlegal.co.uk or call 01625 260577.  Find out for more details of our service packages here.
If you would like to be kept up to date on more topics like this, then why not sign up to receive our regular newsletter.

Could a Company or Charity Secretary Provide Peace of Mind?

Retaining a professional company secretary or charity secretary can bring peace of mind

With an increased focus on effective governance arrangements in companies, not for profits, academy trusts, clubs and social enterprises, and an ever-expanding burden of red tape and compliance duties, Mark Johnson argues that a professional company secretary or charity secretary can add real value to your organisation and provide peace of mind for directors or committee members.

Does any of this sound familiar to you…?

“Sorry we couldn’t get the Board papers out in advance – there just wasn’t time, so can we just scan through the papers during the meeting and take them as approved..?

“The minutes weren’t circulated after the meeting because Jean didn’t have time this month what with her mother being so ill; so most of the action points were unfortunately overlooked. But don’t worry we’ll pick them up at next meeting in 3 months’ time…

“I’m sure this issue has come up in previous meetings, if only we could find the minutes and records to look back through. They used to be on John’s laptop before he stepped down..

“The Board has been grappling with this issue for a while now: like a bad smell, it keeps coming back to every meeting – but no one seems to get hold of it, find out what the answer is, nail it and allow us to move on! I would ask our lawyers, but I worry they would make an industry out of it and it could end up costing us a fortune…

“I sometimes worry about whether we are keeping up to date with our responsibilities – law and policy can change really fast in this area and none of us really has the time to research the latest position. I don’t really know what would happen if we got it wrong – I just hope we’re properly insured…if only we could find the policy documents.

“I know our policies and procedures probably need a thorough review and updating, but we’re all volunteers and we just don’t have the time and capacity to move it forward.

“I just assumed that the Treasurer would file the accounts and annual return by the deadline. It came as a very unpleasant surprise when we all got fined for missing the deadline.

“It came as a nasty shock when we realised were responsible for thousands of pounds in redundancy payments. We assumed the manager who signed the contract had read it properly, but it seems not, and the Board were really unaware of what we had taken on. This could mean we have to close down.”

Don’t leave it to chance

Running a company, charity, club or social enterprise involves a wide range of legal and compliance duties. Effective governance requires proper systems for planning meetings, analysing information, following up action points, and keeping on top of compliance and legal responsibilities. Sometimes you don’t know what you don’t know until it is too late! Unfortunately, ignorance of the law is no defence. It can often be very difficult for busy directors and volunteer board members to keep on top of everything. But the consequences of getting it wrong can be very serious. Some recent examples you may have heard about:

  • Charity was fined £200,000 for a breach of data protection laws – hackers broke into their website and stole data about service users. There was no data protection policy in place and staff had not been trained on the importance of data security.
  • The Trustees didn’t really understand how the organisation’s business model worked- they all had busy day jobs and they trusted the highly charismatic leader- after all, she brought in so much funding, and enjoyed a high public profile. What could possibly go wrong? They were devastated when the black hole in the finances came to light and the organisation went bust and they were all ‘named and shamed’ by the media.
  • The Trustees weren’t aware that the wife one of their fellow trustees was a shareholder in a business which had been awarded a contract worth £150,000 by the Trust; the Trustee hadn’t declared his interest, but the auditor picked this up at year end as a ‘related party transaction’ and once it was made public in the annual report and accounts, the media had a field day. The trust is now under investigation for governance failures and accounting irregularities.
  • A local charity was forced to abandon a fundraising event because the required licences from the local authority had not been applied for in time. Tickets had to be refunded. The organisers faced a backlash from the angry public.
  • A housing association signed a contract to deliver a high profile new project and later found that it did not have the necessary powers in its constitution to carry out the activity- the project had to be unwound and thousands of pounds and management time were wasted.
  • The marquee blew over during the event, causing  injury to a child. After consulting some rabid claims management consultants, the parents sued the committee members. They all thought they were insured, but the policy hadn’t been renewed. They ended up paying £10,000 each from their own pocket to settle the case.

All of these problems could probably have been avoided if a professional company secretary or charity secretary had been employed to keep on top of the paperwork, ensure compliance with regulations, analyse risks and sort out problems. Professional company secretaries holding Chartered Status with ICSA- the Governance Institute have undertaken rigorous academic and practical training across a wide range of areas, including corporate law, corporate governance, risk management, strategy and finance.

Start your New Year on the right footing. Consider retaining an ICSA qualified professional company secretary or charity secretary to help you:

  • manage the paperwork,
  • ensure effective meetings
  • keep on top of compliance duties
  • identify and manage risks
  • enhance board performance.

 


Elderflower Legal & Secretarial offers a cost-effective outsourced company secretarial service to small business, charities, social enterprises and academy trusts. For a fixed monthly fee we can provide peace of mind to directors and board members that compliance duties are being met, returns filed by the deadlines and risks properly identified.
Contact us today for a no-obligation chat or check out our website at elderflowerlegal.co.uk or call 01625 260577.
Find out for more details of our service packages here.
If you would like to be kept up to date on more topics like this, then why not sign up to receive our regular newsletter.

Essential Reading on Governance in Multi Academy Trusts

Essential New Year Reading on Governance in Multi Academy Trusts

2017 looks set to be a year of relentless focus on improving governance in Multi Academy Trusts. Over the past two months a number of excellent resources on governance in Multi Academy Trusts have been published. In case you missed them amid the seasonal commotion, here is a synopsis of the main points.

DfE Guidance

In January the Department for Education published a new version of the Governance Handbook which applies to all schools, alongside a new Competency Framework for Governance.

The Governance Handbook is an essential resource for all those involved in governance of education institutions. It outlines the roles and responsibilities of trustees and governors, their legal duties and provides useful links to further resources.

The new edition has been re-structured around a new clearer articulation of the six key features of effective practice and should be read alongside the new Competency Framework, which describes the knowledge, skills and behaviours needed for effective governance.

The DfE believes effective governance is based on six key features:

Strategic leadership that sets and champions vision, ethos and strategy.
Accountability that drives up educational standards and financial performance.
People with the right skills, experience, qualities and capacity.
Structures that reinforce clearly defined roles and responsibilities.
Compliance with statutory and contractual requirements.
Evaluation to monitor and improve the quality and impact of governance

The most significant changes to the content within other sections include:

Section 2: Strategic Leadership

There is a new section at 2.3 bringing together material about the board’s role as the key decision-maker.  Stresses that the Board is accountable and responsible for all the decisions made and that executive leaders must operate within the powers and authority delegated to them.

Section 3: Accountability

There is a much stronger emphasis on ensuring financial propriety at 3.4. It stresses that everyone on the Board must have a basic understanding of the financial cycle and the legal requirements on accountability and spending. There are suggested questions for trustees to ask and a greater emphasis on securing value for money, using tools such as financial benchmarking resources providing comparative data around consumables, resources and utility costs (useful links are provided).

Section 4: People Makes clear the new requirement that all those involved in governance schools and academy trusts, must have a Disclosure and Barring Service (DBS) check.

  • New advice at 4.1.4 on conducting ‘informed’ elections in which the expectations of, and credentials required of, prospective candidates are made clear.
  • New sections bringing together material on the important role of the chair at 4.3 and of the professional clerk at 4.4.
  • A new explanation at 4.8 of the risks associated with close family relationships between those involved in governance or between them and senior employees (The requirement to publish a register of business interests, to avoid conflicts of interest and related party transactions).
  • Details of the duty on boards to provide information about individuals involved in governance via the Edubase system at 4.8.

Section 5: Structures

Updated guidance on the role of and distinction between Trustees and Members at 5.2.1. An explicit statement that “the most robust governance structures will have a significant distinction between the individuals who are Members and those who are Trustees.”

  • 5.6 that all boards are required to publish a scheme of delegation on their website to explain their governance arrangements, together with new guidance on what makes an effective scheme of delegation.
  • Updated guidance on MATs at 5.2.2 emphasising that a MAT is a single legal entity and that the buck stops with the Board of Trustees in relation to the performance of all schools within the Trust. A section on umbrella trusts at 5.5.1. Now an explicit statement that the DfE will not approve existing trusts wishing to join an umbrella trust which has powers of intervention or governance over its member schools.

Section 6: Compliance

Confirmation at 6.7 that a designated individual on the board must take leadership responsibility for the organisation’s safeguarding arrangements, which include its Prevent duty. New advice at 6.7.1 on handling allegations of abuse made against other children, including ‘sexting’.

Section 7: Evaluation

Updated content on schools causing concern and on coasting schools at section 7.4, outlining OFSTED’s new approach.

The new Competency Framework for Governance

With a foreword by Sir David Carter, the National Schools Commissioner, the new Competency Framework is designed to help governing boards assess what knowledge, skills and behaviours are needed to govern their school or group of schools, most effectively. The Competency Framework is organised into blocks of ‘who needs to have this’. There are some skills or knowledge that the DfE thinks everyone on the board needs to have, and others that the Chair or ‘at least someone’ on the board will need to have.

The Competency Framework is made up of 16 competencies. The competencies are grouped under the headings of the ‘six features of effective governance’, which are described in the Governance Handbook:

1 Strategic leadership

a) Setting direction
b) Culture, values and ethos
c) Decision-making
d) Collaborative working with stakeholders and partners
e) Risk management

2 Accountability

a) Education improvement
b) Rigorous analysis of data
c) Financial frameworks and accountability
d) Financial management and monitoring
e) Staffing and performance management
f) External accountability

3 People

a) Building an effective team

4 Structures

a) Roles and responsibilities

5 Compliance

a) Statutory and Contractual requirements

6 Evaluation

a) Managing self-review and personal skills
b) Managing and developing the boards effectiveness

However, the guidance emphasises that principles and personal attributes that individuals bring to the board are just as important. All those involved in governance should exhibit the 7 C’s:

Committed – devoting the required time to the role
Confident – of an independent mind, able to lead and contribute to courageous conversations
Curious – an enquiring mind and analytical approach
Challenging  – providing appropriate challenge to the status quo, not taking information at face value
Collaborative – prepared to listen and work in partnership with others
Critical – critical friendship which enables bot challenge and support
Creative – able to challenge convention wisdom and be open-minded

The Framework will help with board performance reviews, identifying training needs, succession planning and induction. It may also help prepare interview questions for prospective trustees and governors.

The new Governance Handbook and Competency Framework can be accessed here.

Multi Academy Trusts – Good Practice Guidance and Expectations for Growth

The DfE published this guidance on establishing and developing a multi academy trust in December.

This guidance provides a framework which helps trusts at all stages of their development learn from other multi academy trusts. It sets out the characteristics of successful academy trusts, and the barriers that they will need to overcome in ord