Zones need extra help to keep within the law
Strict monitoring is necessary to ensure that zones' business partners do not gain a commercial advantage because of their unique position, the Audit Commission report recommends.
In the initiative's first year, individual zones broke financial and charity regulations as well as laws forbidding them from borrowing money, the analysis of the first 25 zones' accounts found.
The Department for Education and Employment had responded quickly to the potential hazards by issuing guidance, but there was a "continuing risk" that zone managers did not have adequate control over their finances, the commission found. The report also found that many forum members did not fully understand their roles.
The report said: "From the outset, delivery of the innovative education action zones programme presented the department with risks of impropriety, poor value for money and inadequate accounting."
In the initiative's early days "some zones were spending large sums of public money before they had sound financial controls in place".
However, the DFEE had quickly recognised the potential problems and had responded by issuing guidace, the report said.
Of the first 25 zones the commission found that only three raised the expected amount of business sponsorship. In total, only half of the DFEE's projection of pound;2.5m was raised in the first year.
Late payments of government grants meant that some zones made inappropriate purchases as they attempted to spend the money before the end of the financial year.
The commission found that some zones had used "creative accounting" to make it appear that they had spent the money on time.
WHERE THEY WENT WRONG
* Several zones have leased computers and other equipment under loan agreements. This breaks a condition of the School Standards and Framework Act 1998 which says zones may not borrow money.
* One school awarded a contract to a regular supplier without any form of competitive tendering. The zone refused to reimburse the school for the total amount of the works, withholding the pound;8,000 which could have been saved.
* Another school persuaded a supplier to issue a false invoice dated March 1999 to give the impression that they had used the fund before the year-end.
* One forum approved a payment to its chairman, a headteacher, for his services even though this broke a Charity Commission law that trustees must not benefit personally. The money was eventually paid directly to the head's school.