Education Funding Agency: better oversight spending school money needed

• Report: Education Funding Agency and Department for Education 2012-13 financial statements
• Report: Education Funding Agency and Department for Education 2012-13 financial statements (PDF 212 KB)
• Public Accounts Committee

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

"The Education Funding Agency’s work has expanded rapidly and, while it has succeeded in getting money out to schools on time, it has not yet got to grips with effective oversight of how that money is spent.

It needs to do more to address potential conflicts of interest in academies. We were concerned that individuals with connections to both academy trusts and private companies may have benefitted from their position when providing trusts with goods and services. The Agency has reviewed 12 such cases but it is likely that many more exist and have gone unchallenged.

The Department for Education takes the view that these so-called ‘related-party transactions’ are acceptable. We feel that they are always open to accusations of conflicts of interests, even when supposedly on a not-for-profit basis, and this serves to undermine public confidence.
We are therefore calling on the Agency to reconsider its policy which permits related-party transactions.

The Agency is too reactive and does not spot risks or intervene in schools quickly enough. It needs more complete, accurate and timely information on academies’ finances and to get much tougher on those who fail to comply with reporting requirements: nearly one in ten academy trusts failed to submit their accounts on time last year.

It does not properly analyse the data it does have to identify risks and, as a result, interventions in at-risk schools can come too late, as in the case of the E-Act Academy Trust. The Agency needs a proper strategy for collecting and analysing data effectively so that it is much quicker off the mark in future.
The Agency has no way of knowing whether academy chief executives and trustees are ‘fit-and-proper persons’.

In a very devolved system, as in the case of academies, a lot of trust is invested in the organisation, chief executive, principal and trustees for managing public money. However the Department does not have a process for vetting those appointed as academy trustees or chief executives. In the recent high-profile case of Kings Science Academy, the Agency did not even know who the chair of trustees was.

The Department should introduce, at individual academy and academy trust level, a fit-and-proper persons test.

The Comptroller and Auditor General qualified his opinion on the Department and Agency’s annual reports laid in January on a number of grounds relating to both poor data and flawed methodology. For example, the Department knew what land and buildings were used by academies, but did not always know who owned them.

We recognise the scale of the task that the Agency faces as it deals with an expanding workload whilst reducing its costs by 15%. But it is essential that the Agency now gets to grips with effective oversight to improve public confidence in the system."

Margaret Hodge was speaking as the Committee published its 61st Report of this Session which, on the basis of evidence from Chris Wormald, Permanent Secretary, Department for Education, Peter Lauener, Chief Executive Officer, Education Funding Agency, and Simon Parkes, Chief Financial Officer, Education Funding Agency, examined the Education Funding Agency and Department for Education 2012-13 financial statements.

Since it was set up in April 2012, the Education Funding Agency (the Agency) has succeeded in getting money to schools, local authorities, colleges and other education providers on time. It needs to improve efficiency, transparency and accountability in the education sector, especially in respect of the growing number of academies. The Agency needs complete, accurate and timely data, such as on academies’ finances, and needs to be more robust in relation to academies that fail to comply with financial reporting requirements. As the Department for Education (the Department) itself acknowledged, where the Agency does have the data, it needs to be quicker and smarter at spotting risks and intervening quickly in cases of poor financial management and governance in academies, including free schools.

We recognise the scale of the task that the Agency faces as it deals with an expanding workload whilst reducing its costs by 15%. But it is essential that the Agency now gets to grips with effective oversight to improve public confidence in the system. Our recommendations are designed to help it in that task. We also recognise that, by consolidating academies into its accounts, the Department is now providing a more complete picture of spending in the education sector. But the Department is still struggling to solve the problems of reconciling different financial year ends, of clarifying who exactly owns academies’ land and buildings, and of improving the data it receives from academies. Finally, the Agency must be prompt to act in response to any evidence suggesting conflicts of interests, where academy trusts buy goods and services from individuals and organisations connected to their schools.

Conclusions and recommendations

The Department for Education created the Education Funding Agency in April 2012 to ensure efficiency, accountability and transparency in the education sector. In 2012-13, the Agency distributed £51 billion of capital and revenue funding for 10 million learners to local authorities, academies, academy trusts, further education institutions, sixth-form colleges and other types of education providers. Since it was established, both the scope and the scale of the Agency’s activities have changed and expanded rapidly: for example, during its first year the number of academies almost doubled to nearly 3,000 and it took on new responsibilities including managing the Youth Contract for 16- to 17-year-olds. Between 2012-13 and 2015-16, the Agency expects that the number of all education providers it funds will increase by around 50% to almost 12,000, of which nearly 7,000 will be academies. At the same time, the Agency plans to reduce its administration costs by 15%. Ensuring proper accountability for public spending with less resources will be a huge challenge and the Department has yet to demonstrate that it can meet its responsibilities for proper accountability.

The Agency is accountable to the Department for the funding it distributes and, in turn, the Department is accountable to Parliament for ensuring regularity, propriety and value for money in the work that it and the Agency undertake. In 2012-13, the Department and the Agency consolidated academies into their financial statements for the first time, and laid their annual reports and accounts just prior to the statutory deadline of 31 January 2014. However the Comptroller and Auditor General qualified his opinion on these financial statements on a number of grounds relating to both poor data and inadequate methodology.

The Agency lacks the systems and data it needs to provide transparency and accountability, and demonstrate efficiency, in the education sector

We recognise the Agency’s success in moving quickly to distribute funding on time. At the same time, the Agency has had to manage a huge expansion in the number of academies. But the Agency now needs to get to grips with improving the information that is vital to its critical oversight role. The Agency relies on information provided by academies, local authorities and other government bodies on, for example, learner numbers, the size and condition of schools and in some cases their finances. But the Agency has found it difficult to gather complete, consistent and high-quality data. It does not have a clear policy or understanding of what data it needs to collect, and how it will use these to provide Parliament and the public with sufficient transparency over education spending and, in turn, to support proper accountability. It has contributed further to the problem by holding data across a range of different systems and spreadsheets, from which it is challenging to establish a ‘single version of the truth’ and impossible to make sensible comparisons.

Recommendation: The Agency needs a clear information strategy, which specifies the data it needs to collect and use to provide transparency and accountability and improve efficiency in the education sector. It also needs to get systems in place as quickly as possible to capture data at low cost and without overburdening the sector.

The Agency has not yet achieved an acceptable level of compliance with its reporting requirements

The Agency requires some education providers, such as academies, to submit financial returns and other information in line with funding agreements (a contract between them and the Secretary of State). But a number of providers still do not comply with the conditions of their funding agreements. Between April 2012 and April 2013, there were 411 breaches of funding agreements, of which 339 (82%) related to academy trusts’ failure to submit financial returns on time, including submitting annual accounts. For 2011-12, 13% of academy trusts failed to submit annual reports and accounts by the deadline of 31 December 2012 and for 2012-13 this figure still stood at a worrying 9%. Where academies do not comply with the Agency’s requirements it can issue them with a financial notice to improve, so they lose some financial freedoms and flexibilities or ultimately the Agency can terminate a funding agreement. By March 2014 the Agency had only issued eight financial notices to improve to academies. But the Agency has yet to demonstrate an effective approach to ensuring proper compliance and has yet to show that restricting financial freedoms works as an effective deterrent for non-compliance.

Recommendation: The Department and Agency need to implement an effective joined up strategy for enforcing compliance with funding agreements and consider appropriate incentives and sanctions.

The Agency is too reactive and does not spot risks or intervene in schools quickly enough

The Agency’s knowledge of poor financial management or governance in schools does not come from a systematic or forensic analysis of the data it holds in order to identify risks; instead, it relies on broad desk-based reviews that are not sufficiently risk focused. The Agency also relies on whistleblowers, and the work of external auditors of academies. As a result, Agency interventions in at-risk institutions can come too late, as in the case of E-Act Academy Trust. Even when the Agency is presented with data that should trigger concerns and lead to further investigation, the Agency has not always taken action quickly enough, as in the case of Kings Science Academy in Bradford. The Agency accepts that it needs to improve its data analytics and horizon scanning.

Recommendation: The Department and Agency should set out how and when they will develop an analytical capability to spot risks and target their interventions early.

The Agency does not know enough about conflicts of interest in academies and the risk they pose to the proper use of public money

We were concerned that individuals with connections to both academy trusts and private companies may have benefited personally or their companies may have benefited from their position when providing trusts with goods and services. The Agency has reviewed 12 cases of related-party transactions, when a conflict of interest could arise; but it is likely that many more exist and have gone unchallenged by the Agency. In line with accounting standards, academy trusts are required to disclose related-party transactions in audited accounts, but the Agency does not keep a log of such transactions, and is unaware of how many disclosures have been made. The Agency now insists that goods or services provided by individuals or organisations connected to academy trusts, such as trustees, or relatives of trustees, are provided at no more than cost, but it only introduced this rule in November 2013. The Department takes the view that related-party transactions are acceptable. We feel that related-party transactions are always open to accusations of conflicts of interests, even when supposedly on a no profit basis.

Recommendation: The Agency should reconsider its policy which permits related-party transactions. At the very least it must be able to extract and analyse complete information on related party transactions and must then use that analysis to determine risk-based interventions.

The Agency has no way of knowing whether academy chief executives and trustees are ‘fit-and-proper persons’

In a very devolved system, as in the case of academies, a lot of trust is invested in the organisation, chief executive, principal and trustees for managing public money. It is therefore reasonable to expect that these people are properly vetted. The Department has a process to vet those planning to open free schools; however, it told us that it does not have a fit-and-proper persons test for vetting those appointed as academy trustees or chief executives. At Kings Science Academy, the Agency did not even know who the chair of trustees was.

Recommendation: The Department should introduce, at individual academy and academy trust level, a fit-and-proper persons test.

There are flaws in the methodology used to consolidate the accounts of academies, as well as data quality issues, which undermine accountability

In 2012-13 the Department and the Agency consolidated academies into their financial statements for the first time, and the C&AG qualified his opinion on a number of grounds, relating to methodology and poor data. Of four qualifications, the Department accepts that two will be difficult to rectify. First, the Department has to consolidate academies’ September-to-August accounts into its own April-to-March account, which involves making adjustments that carry risks. The Department intends to discuss what to do about this with HM Treasury and the National Audit Office. Second, the Department knew what land and buildings were used by academies, but did not always know who owned them. The Department predicts that it would cost £30 million to collate the necessary data on land and buildings and a further £8 million a year to keep these data up to date.

Recommendation: The Department should set out how and when they will address the causes of each of the qualifications of the C&AG’s opinion, particularly those relating to issues of methodology or poor data quality.

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