Blogs/Vlogs

DfE proposes closer related party monitoring

7 June 2018

The Department for Education (DfE) will begin closer monitoring of related party transactions from September in an attempt to prevent abuses, according to a recent report from Schools Week (to see the full article, please click here). Under the proposal, trusts will need prior DfE approval for business transactions with entities controlled by academy trustees, members, or their close family.

The move comes in response to a highly critical Public Accounts Committee report in March, which concluded that current rules around related party transactions are ‘too weak to prevent abuse’ (for details of the key findings of this report see our blog: House of Commons committee addresses risks following review of academy schools’ finances).

The committee believes that prior approval will help prevent breaches of the rules before they can occur, arguing that as things stand ‘such abuses only come to light after the fact, often as a result of the year-end audit, or whistle blowing’. The DfE has accepted the recommendation, and will provide full details of how the new system will operate within the 2018-19 Financial Handbook; this will apply to trusts from September, coming into full effect by August 2019.

With September only a few months away, trusts should be reviewing their current related party business arrangements to ensure the identification and monitoring of such arrangements is robust and transparent. As a ‘hot topic’ with the DfE, trusts may also wish to incorporate a review of related party transactions into their internal audit programme.

The key source of abuse identified by the committee report surrounds the need for related party transactions to be 'at cost'. The DfE requires that related party transactions worth more than £2,500 a year cannot contain a profit element, and so providers must only charge the underlying cost to themselves. However, particularly where services are concerned, the committee warned that costing "can be complex and open to manipulation" and it is therefore difficult to prove that services are being provided 'at cost', as the rules require.

Trusts should therefore be extremely careful when engaging related entities for the provision of services, and extra checks may be needed to mitigate the risk of breaching DfE rules. Where such arrangements are being considered you might also want an outsider’s opinion, which our academy experts are able to provide. In many cases this will help in answering the key question 'how would this look to someone outside the trust?' It’s this question more than any other which will highlight whether the trust’s actions are likely to be considered appropriate by the DfE, parents, and other stakeholders.

More generally, the DfE’s acceptance of the committee’s recommendation, and numerous recent stories of Trustees abusing the rules for personal gain, raise serious questions about the appropriateness of engaging in related party transactions at all. Margaret Hodge, the former chair of the committee, argued for a blanket ban on all such transactions, and current moves seem designed to make such arrangements increasingly difficult to enter into. But for now the right to decide rests with trusts, and with it the responsibility to ensure that where related party transactions are taking place, trustees are doing all they can to safeguard their reputations and the public funds with which they have been entrusted.

If you have any questions regarding any current or proposed related party arrangements, or how internal audit can help mitigate the risks facing your trust, please contact your local UHY academy expert. Alternatively, to read more academy schools blogs click here.

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