Academies trading with connected parties, as a topic, has been in and out of the spotlight for a number of years leading to many news articles and even television programmes identifying amounts paid to related parties, including family members and companies related to the Trustees.
This is therefore the second in a series of three articles looking at the issue. We will explore:
- What is a connected party;
- The key risk areas for transacting with connecting parties; and
- How to manage potential conflicts of interest.
These articles act as a reminder of the requirements of the Academies Financial Handbook (AFH), which are to ensure robust governance and effective financial management. The latest version of the Handbook, effective from 1 September 2017, states that ‘The board of trustees has wide discretion over its use of the trust's funds, which it must discharge reasonably and in a way that commands broad public support. It is responsible for the proper stewardship of those funds, including regularity and propriety, and for ensuring economy, efficiency and effectiveness in their use – the three key elements of value for money.’
What are the key risk areas?
The ESFA published a review of related party transactions in academies back in 2014 and identified 2 key risk areas:
- Procurement processes; and
- Not observing ‘at cost’ requirements.
The ESFA discovered that some trusts had not followed proper procurement processes. For further guidance on procurement processes please see here. Trusts need to follow their own finance manual and procedures when obtaining quotes (and taking heed of OJEU for large contracts). In the third article to this series we will discuss how to manage the conflicts that may arise during the process.
At cost requirements
A Trust must pay no more than ‘cost’ for goods or services provided by a connected party. Cost includes all the direct costs such as materials and labour directly used in producing the goods or services and indirect costs comprising of a reasonable share of fixed and variable overheads.
Trusts must make sure that the agreement with the connected party is supported by:
- A statement of assurance from that their charges do not exceed costs of the goods or services; and
- An open book agreement that the supplier can demonstrate clearly that their charges do not exceed the cost of supply.
However the good news is there is a De minimis limit for the requirement. The ‘at cost’ requirement applies to contracts for goods and services from a connected party exceeding £2,500, cumulatively, in any one financial year of the trust.
Make sure you pre-order your complimentary copy of Kreston's Academies Benchmark Report 2019 here: http://eepurl.com/ge8wvr
This year the report includes over 350 Trusts representing nearly 1000 schools and is based on those Academies that prepared financial statements for the period ended 31 August 2018 and which were audited by member firms of Kreston UK.