Connected body transactions

1. Connected body transactions

2. Overview • Introduction • Requirements • Disclosure • Audit approach • Current issues

3. Introduction • ‘Related parties’ are discussed within: • UK financial reporting standards (FRS 8 Related Party Disclosures) • Charities SORP (paragraphs 221-233) • Related party transactions can deliver value for money and encourage innovation however they also pose a risk that transactions are not in the best interests of the trust • It is important to have transparent disclosure

4. Introduction • The Academies Financial Handbook (AFH, or Handbook) interprets requirements for the academy sector • The academy sector must also demonstrate regularity, propriety and value for money of public funds • ‘Connected bodies’ are discussed within the AFH • Note: This presentation will not cover disclosure of an employee’s remuneration where the employee is also a trustee – please refer to our other presentations

5. Requirements of the AFH • Requirements were clarified within 2013 AFH V2 (S2.6) and are refined each year • Requirements apply to contracts that are agreed or renewed on or after 7 November 2013

6. Definition of ‘connected bodies’ • Defined in detail within S2.6.2 – 2.6.3 of the 2013 AFH: • Member or trustee • Individual or organisation connected to a member or trustee (including close family member, business partner or controlled organisation) • Individual or organisation that can appoint a member or trustee • Individual or organisation recognised by the Secretary of State as a sponsor

7. Goods/services to be ‘at cost’ • For these purposes we mean the ‘full cost’ of resources used in supplying the goods or services, including: • direct costs (the costs of any materials and labour used directly in producing the goods or services) • indirect costs (a proportionate and reasonable share of fixed and variable overheads) • Full cost must not include an element of profit

8. Proper procurement • Goods/services procured from connected bodies are subject to normal procurement requirements • Trust’s financial regulations should outline procurement processes and handling conflicts of interest • S2.5.3 of the AFH refers to: • annex 4.4 of HM Treasury’s Managing Public Money • contractual thresholds as provided in the Official Journal of the European Union (OJEU) • Further guidance available at https://www.gov.uk/government/collections/buying-for-schools

9. Statement of assurance and open book agreement • Statement of assuranceFrom the connected body to the trust confirming that their charges do not exceed the cost of goods or services • Open book agreement Requirement for the connected body to demonstrate clearly, if requested, that their charges do not exceed the cost of goods or services

10. Applicability to employment contracts • Provisions do not apply to contracts of employment • Principles of regularity, propriety and value for money still apply • Salaries paid should be appropriate to the individual’s skills and experience and the salary rates paid in the wider market

11. Financial disclosure • Guidance provided in the Accounts Direction • Note 29 (Coketown Accounts) • Section 7.6

12. Why do we need these rules? • We need these rules to help us mitigate and/or identify potential risks to public funds • Related party transactions face significant scrutiny within the academy sector. • These rules ensure: • Public accountability and transparency • Concerns of our regulators, including NAO and PAC, are addressed • Transparency helps manage both real and perceived conflicts of interest

13. What if the rules aren’t followed? • We will follow up – if it is not clear whether related party transactions were properly entered into • Breaches – will be taken seriously • A financial notice to improve – may be issued if the rules are breached, and future connected party transactions may need our approval

14. Audit approach • Auditors should focus on whether trustees have met their obligations • Potential tests: • declarations of business interests have been complete • trust’s procurement and tendering process followed • trust has obtained and reviewed statements of assurance • trust has requested, under the open book arrangement, a clear demonstration that the charges do not exceed the cost of supply • governors who provide services are not receiving a profit • no connected party receives payment under preferential terms • if employees are providing external consultancy within normal working hours that the income is received into trust’s accounts

15. Reporting issues • The auditor should report issues as follows: • Regularity report: This conclusion should be modified where requirements have not been met. To note, connected body transactions are considered material by nature • Management letter: Findings should be reported where it is unclear whether requirements have been met • We will follow up if it is apparent that the auditor has omitted issues that we subsequently identify

16. Outcomes from 2012/13 financial statements (1) • Around 1,000 trusts disclosed related party transactions • Around 150 trusts disclosed related party transactions of >£100k • Around 20 trusts disclosed related party transactions of >£500k

17. Outcomes from 2012/13 financial statements (2) • Auditors’ findings: • Our findings: • Inadequate disclosure for around 250 trusts • Further enquiry of 50 trusts with work ongoing to fully understand these transactions

18. Outcomes from investigations • EFA investigations have identified a number of related party transactions that pose a significant risk to public funds, including: • Funds passing to connected organisations with no apparent benefit to the academy trust • Normal procurement processes being circumvented, including lack of open tender • Breach of Charity Commission rules that prohibit more than 50% receiving benefit from the trust • A number of further investigations are underway • Investigation reports available on gov.uk

19. Future plans • The Public Accounts Committee recommends that we reconsider our policy which permits related party transactions • We continue to review outcomes from 2012/13 and consider how the existing policy framework can be strengthened further • Any developments will be reflected within a future version of the AFH

20. Summary – What you should do • Read the relevant version(s) of the Handbook – available on the gov.uk website, and may also be accessible via forthcoming EFA ‘Information Exchange’ • Assure yourself that you have met and continue to meet the requirements • Register of business interests • Procurement policy and process • Review of individual transactions • Prepare to make the necessary disclosures and confirmations in your financial statements

21. Webinar timetable • You can register for the webinars at https://registration.livegroup.co.uk/academyfinance/ • You can submit questions for the panel in advance when you register, or log back in later and submit your questions • If you can’t attend on 15 July, you can watch a recording of the webinar online after the event

22. Thank you for watching