Once again how academy trusts use public funds is splashed across the media. This time it is Bright Tribe Trust that is accused of misusing those funds in a variety of ways, including allegedly making payments to companies connected with founder Michael Dwan. What those allegations reveal is an ongoing interest in the media, the public and government with connected relationships between academy trusts, their founders and associated companies.
In this instance we are not discussing payment of directors or members, rather we are talking about the rules where one connected entity provides services to the academy trust and the academy trusts pays for those services.
The Academies Financial Handbook (‘AFH’) provides a very detailed set of criteria that have to be followed by the directors of an academy trust before they can authorise use of public funds in a transaction with a related party (see section 3.10.12 for what a related party is).
These criteria have been part of the framework for academies from before 2010 and are familiar, in general terms, for the wider charity sector. The concept of propriety in the use of public funds (i.e. those provided by government or indeed raised from the general public) is a cornerstone of both the education and charity sectors as a whole.
Therefore for those directors who are faced with the possibility of related party transactions, there are two questions to ask before looking at the detail of related party transaction criteria:
- Would this proposed transaction look suspect in the public eye? Irrespective of the criteria and whether a particular transaction meets them, would the public perception of the transaction be negative such that any actual or perceived benefit or cost saving of such a transaction would be outweighed by the negative reaction to it?
- Why are we considering this transaction? Perhaps an odd question to ask but in the myriad market that academies have created why is a related transaction the best value and how do we know that?
Even if directors are of the view a proposed transaction is acceptable having considered the above questions and the detailed criteria; from 1st April 2019, all related party transactions will need to be reported to the Education and Skills Funding Agency (‘ESFA’) with other forms of transaction needing the ESFA’s prior consent. In the light of this more stringent regime, and the reaction of the press and wider public to the occasional allegations of impropriety, it is wise for all Boards of Directors to seek consent for every related party, even if not strictly necessary under the criteria. From a risk management perspective, seeking consent, even if to be told no explicit consent is required by the ESFA, is a sensible and prudent step to take, especially in the light of the severe consequences that can befall an academy trust following an ESFA investigation and the issuing of a Financial Notice to Improve. This new administrative inconvenience, and the pause in process it creates, may in fact end up proving to be a boon if it encourages a more thorough review of procurement and director reflection on how a particular contract could be viewed through the public lens.