Potential conflicts of interest in the form of “related-party transactions” are another highly contentious area of academy trust finances. These transactions are payments made between people or organisations connected with one another, in which they are in a position to potentially exploit their relationship, such as when awarding large contracts or simply paying individuals for services rendered.
Despite demands from teaching unions for such transactions to be banned, a Tes analysis shows that their use has soared in the space of just one year.
The Department for Education’s consolidated annual report and accounts for the academy sector, released last month, reveal how related-party transactions of more than £250,000 have risen by 17 per cent.
Academies paid out £61.9 million on these “high-value” transactions in 2015-16,compared with £53 million the previous year. There has also been a 50 per cent rise in the overall number of transactions, up from 2,005 in 2014-15 to 3,033 in 2015-16. To put this into context, in January 2015 there were 4,722 academies, a number which grew by 16 per cent to 5,474 the following year.
Does this matter? After all, related-party transactions are permitted under the Academies Financial Handbook, provided that open and transparent procurement procedures have been followed, and any potential conflicts of interest are adequately and appropriately managed. The government also requires that any such service valued at more than £2,500 should be carried out “at cost” to prevent anyone from making a profit on the deal.
But even where the payments are permitted, they are best avoided “to ensure impartiality and avoid any potential conflict of interests”, according to Nick Brook, deputy general secretary of the NAHT headteachers’ union. He says: “Related-party transactions are just not sensible, even if entered into faithfully. NAHT recommends that schools do not buy services from people with personal connections to the school.”
Many of the payments cited in the academy accounts were to relatives of trustees, chief executives and other senior figures, our analysis shows. Nearly 40 people have been paid or employed by academy trusts in which their relatives were in a position of influence. The list includes husbands, wives and children of academy bosses or trustees.
Nearly one in five trusts (23 out of 121, or 19 per cent) have either employed family members or handed contracts to firms run by relatives or partners of trustees and other senior figures. There is nothing to suggest any wrongdoing on the part of those concerned, although the Education and Skills Funding Agency’s (ESFA) outgoing chief executive, Peter Lauener, wrote to academy trusts last year reminding them to consider “whether the appointment of family members is giving rise to actual or perceived conflicts of interest”. In 2015-16, before Lauener’s advice had been issued, one trust paid the daughter of a trustee to give dance lessons. Another hired the principal’s daughter to provide teaching support. And at one trust the chief executive’s mother-in-law was on the payroll.
Paying a relative does not break any rules in itself, says Phil Reynolds, from accountancy firm Kreston Reeves. He says: “Some are genuine transactions that do represent value for money and the appropriate processes have taken place.” He gives the example of a trustee’s sibling securing a job at an academy in which the relative was not involved in the interview process and the role was advertised. But he says: “Some trusts don’t follow these procedures to ensure transparency and therefore suspicions are raised.”
There might be genuine reasons behind their failure to follow the guidance, he adds, such as not seeing any potential conflict, “but some might be avoiding [seeing] them for obvious beneficiary reasons”.
There is nothing to suggest that this is the case for any of the situations highlighted by Tes. In an instance in which a related-party transaction has taken place, ESFA rules state that it must be disclosed, regardless of the size of the payment, along with the names of the related parties. But not all trusts analysed by Tes have identified individuals involved in the payments. The annual report of one such case, the Boston Witham Academies Federation, simply states: “Certain people with a close connection to various trustees of the academy trust are also employed and remunerated by the academy.”
The federation’s chief executive officer, Adrian Reed, says: “We believe that the disclosure in the accounts is appropriate and transparent. We will, however, review your findings with our external auditors and consider the implications for disclosure within the 31 August 2017 accounts.”
Meg Hillier, chair of the Public Accounts Select Committee, believes it is best to simply avoid related-party payments. She says: “Despite previous warnings, it seems that too many still think it’s OK to do business with relatives or businesses with whom the staff or governors have personal connections. It’s not acceptable. Schools aren’t personal fiefdoms.” But banning related-party transactions is not the answer, argues Matthew Wolton, of law firm Knights 1759, who specialises in academies. “If someone is intent on defrauding an academy, they would simply disguise the transaction so it would not be picked up,” he says. Wolton claims related-party transactions often result in “excellent value”.
He cites one example of an academy trust that needed to resurface a car park and ended up spending more than it should have done due to a fear of being criticised for a related-party transaction. “One of the trustees, who owned a local building company, said he could get his employees to do the work ‘between jobs’ and the only charge to the academy trust would be the materials used,” he recalls. “The academy trust would have saved thousands of pounds.
“However, because at the time there was a lot of negative press about related-party transactions, it was felt the academy trust should not run the risk of being perceived as being conflicted. As a result, thousands of pounds extra was paid for the job, which could otherwise have been spent in the classroom.”
A DfE spokesperson says “trusts must apply our no-profit rules and publish interests of members and trustees, so that conflicts of interest are avoided. All related-party transactions must be disclosed in their audited accounts, which are published.”