Academy Schools Sector in England Consolidated Accounts 2015-16

29th January 2018

Scope of the inquiry

The Academy Schools Consolidated Accounts take accounts from all 3,013 trusts operating in 2015–16 and put them all in one place. The Department for Education previously integrated these accounts with their general departmental reporting, but decided to separate the two owing to different year-end dates, and the complicatedness of the task.

This first set of Academy Schools Consolidated Accounts was qualified by the National Audit Office’s Comptroller and Auditor General, meaning that he could not have full confidence in them. This was primarily owing to a lack of evidence for the inclusion of £45 billion in Academy Trusts’ land and buildings.

The National Audit Office was also concerned that different Academy Trusts produce accounts in different ways, requiring the Department to make adjustments when consolidating them. It was also concerned that the Department’s framework for assessing the condition of land and buildings was not sufficiently strong.

The Public Accounts Committee has a long-running interest in the financial performance of schools. The Committee will ask representatives from the Department for Education whether they believe the extrapolation and consolidation of Academy Trust accounts is helpful, whether they are concerned about the difficulties in accomplishing that, and how they plan to tackle the National Audit Office’s concerns.

 

Questions From Gillian Keegan MP

 

Q11            Gillian Keegan: Thank you very much for producing the accounts. I had the pleasure of reading them over the weekend. I understand that you were operating on different dates, but can you explain why it took so long to produce a separate set of accounts for academies?

Jonathan Slater: Absolutely. I do not know if you heard this before the meeting began, Chair, but just before I do so may I say that you have two accounting officers in front of you, and one of them—me—very much hopes to get to see his daughter singing at the O2 centre later on this evening? I am hoping to get away at quarter to 6, leaving you with another accounting officer, albeit that that is not the ideal plan. I just wanted to make sure that you knew that.

Chair: We hope that, if you answer the questions briefly and we ask them briefly, we will all be away by half-past 5. Short, candid answers are the order of the day.

Jonathan Slater: Fine. It took us a long time to get this right because it is the first time we have done it on the basis of an academic year, which gives us the chance to get the thing unqualified. It will take us a long time to get the next one right, because we have to sort out the land and buildings qualification. From that one onwards, we should get it done in accordance with normal practice before the summer recess.

Q12            Gillian Keegan: But academies have been operating for quite a long time, and I think it is much more useful to have this view of them than the view that other Committees will have had previously. I am just wondering why you are making that change, with transparency on the accounts for academies coming in only this year for the first time. It did not come two, three, four or five years ago.

Jonathan Slater: The problem with doing it the old way, the way we did it for the previous four years, was that it was going to get qualified automatically every single year because academy trusts do everything, as you know, on an academic-year basis. We had to do it on a financial year basis, and we just got a qualification each time. You did not want me—I did not want this either—to just come along forever saying that they are always going to be qualified.

Q13            Gillian Keegan: I understand that, but you could have made the change that you made this year three years ago.

Jonathan Slater: Yes; I think there was a reluctance on all sides of the table to break the discipline of a reconciliation on a financial year basis. I think that you, we, the NAO and everybody else wanted to see if we could get it done properly on a financial year basis. Eventually, we all agreed that it was not working, and I was lucky enough to be the permanent secretary who had the chance to put it right.

Gillian Keegan: Okay. Well, at least we’ve got them now.

Chair: That is a positive spin on it.

Q14            Gillian Keegan: I understood the second part about land and buildings, which is of course another big factor that is missing from the accounts. I think you have identified 13,000 bits of data that you need to consolidate between now and next October—I guess that is the new date. Can you just go back and explain the process that you will go through? How confident are you that you will get that?

Jonathan Slater: It is going well so far. Last year, we piloted the approach of getting the relevant documentation to prove the land and building ownership with 30 trusts. We did that with the NAO watching us and it went well, so we are now rolling it out across all 3,000. It is the first time that we have done it. I cannot say that it will definitely work, but it is looking good so far.

The thing that made us qualified in the past was that we just assumed that all the academies owned their buildings. We therefore included them in our accounts. The NAO rightly said, “Some of them might not. Some of them might be owned by a church that could take them back in two years’ time. You have to be able to prove the ownership, and you can do that only if you look at every single case.” That is what we are doing at the moment, and it is going well so far.

Q15            Gillian Keegan: Will you be taking that as a static state, or will you be looking at changes in ownership as well?

Jonathan Slater: Of course. As I suggested to the Chair earlier, the reason it is taking us longer for this next round—the round to October—is because you have to do the 13,000 once, but once you have done that, for future years, as you say, all we will need to do is add in new ones and take out old ones.

Q16            Gillian Keegan: I have had very little involvement with academy trusts, but one that I have been involved with had a movement of the land and buildings from one part of a trust to another charitable organisation and, I think, eventually to somewhere else in what looked potentially like sleight of hand on the ownership of the buildings. How will you be able to see those movements that have happened over the years that we have had academy schools?

Jonathan Slater: We are doing a snapshot for the ‘16-‘17 accounts now. Thereafter, we will ask those trusts to demonstrate changes each year.

Q17            Gillian Keegan: So that is looking forward, not to the past. You will not be able to see anything that has moved into a different ownership structure already.

Jonathan Slater: We will be describing the world as we see it for the ‘16-‘17 year. That is what we will be doing only for that year.

Q18            Gillian Keegan: And it is not possible for you to also get—

Jonathan Slater: If there were concerns that anybody had about anything like that, obviously you should draw them to our attention and we would be happy to look at them.

Q22            Gillian Keegan: Now we have our first set of accounts, how confident are you that the resources given to academy trusts are being managed in an effective and proper manner?

Jonathan Slater: I am confident for the vast majority. There are equally, as the SARA demonstrates, trusts that have not been managing their resources properly. One can be positive about the fact that 98% of trusts’ accounts are, indeed, unqualified; that only 5% of them have issues of regularity; and that only in 1% or 2% do we need to put in place financial notices to improve. Nevertheless, in 1% or 2% we need to go in with such notices. In 1% or 2% of cases, we see related party transactions that are in breach of the rules. The vast majority are using their resources as they are supposed to and some are not. That is one of the things that keeps my ESFA colleagues very busy.

Q23            Gillian Keegan: We will go into some of those examples, because there have been some high-profile examples. If you look at the newspapers, I think they are reporting for next year’s accounts that eight of the top 13 largest groups have issued warnings. Are you expecting not to be so confident next year?

Chair: That was a feature in The Observer at the weekend.

Jonathan Slater:  I interpret you question as: are they using their resources properly? To which I gave the answer that I did. I think the question you are now raising is not so much, “are they using their resources properly?”, but, “have they got enough money?” That was the question being raised in The Observer.

We have had a number of discussions here about the financial challenges that schools are facing and the extent to which they can improve their efficiency. This is the 2015-2016 data for academies. We have more up-to-date data for local authority-maintained schools—for reasons we can explore if you would like—which show that the number of schools in surplus on the maintained side has dropped a bit from 2015-16 to 2016-17. There are still 91% of maintained schools in surplus, but 9% are in deficit, so that is the balance. I would not be at all surprised to see a similar change in the academies as we get to the 2016-17 data in October, because, of course, in the last two financial years, schools have been faced with the challenge of having real-terms protection, but not real-terms per pupil. We talked about the challenge of schools improving their efficiency, and I would not be at all surprised if some schools are struggling with that more than others over the next year or two. It is our job to work with them to help them improve.

Sir Geoffrey Clifton-Brown: On this same subject, The Guardian reported on 27 January that “More than half of the major operators of the government’s flagship academies programme have sounded the alarm over school funding”. Some of the bigger groups—Ormiston Academies, Academies Enterprise Trust, Greenwood Academies and Ark Schools—are reporting that all or some of their schools will have a deficit this year. What is your Department doing about this?

Jonathan Slater: It is important to distinguish between an in-year deficit—what a trust might choose to do with its resources in a particular year—and its underlying financial position. So Ark might well choose, as indeed they have done, to spend more on a particular school in a year than the income for it, but what is more interesting from an overall position is the extent to which they are, as a trust, in surplus overall to a significant degree—and they are. The situation is different trust by trust, and we can explore individual cases, but for us it is more interesting to look at the cumulative position: are they cumulatively in surplus or deficit? A trust taking over a failing school, as Ark does, might deliberately choose to invest in that school to improve its performance in-year, but the question is about the underlying position. The underlying position for ’15-’16 is that there is about £2.3 billion of surpluses and £50 million of deficits. I have suggested that for ’16-’17 the figures might tilt a bit—but just a bit. It is important to be clear on what we are describing in any one moment.

Q37            Gillian Keegan: What percentage of the trusts have related party transactions relating to either the governors or the headteachers?

Jonathan Slater: Two out of five; 40%.

Q38            Gillian Keegan: Forty percent?

Jonathan Slater: Of course, it hides a multiplicity of circumstances. There will be many people in this room who have been a governor at a school, and they will have heard a conversation in which somebody says, “I can sort this out. I can provide some activity. I’ll do it at less than cost.” That is a related party transaction, and it is a jolly good thing too, as long there is some transparency about it, it is procured properly if it goes above a certain level and so on. It is about identifying what is good and what is bad. Sometimes it is bad, and then we take action.

Q41            Gillian Keegan: I think the point is what happens if you end up with one that is dodgy. We have heard examples here. As I said, I have very limited knowledge of the academies sector, but every single one I have looked at has been a dodgy one; I don’t know why that is the case. It seems to me, with this whole concept of related party transactions and multi-academy trusts, that if they go wrong, there is very little protection for those left behind—either the schools or the people trying to pick up the pieces to make sure the pupils get the education they deserve. When these things have happened, what have you learned from this and what changes have you put in place to stamp this out?

Jonathan Slater: It is in the nature of this sort of discussion. We are about to discuss the cases that go wrong, and you want to know whether there are more than there should be. I draw your attention again to the fact that 98% of trusts’ accounts are unqualified, 95% have no regularity concerns and 2.5% have concerns about related party transactions. Where we have those concerns, action is taken. I invite you to see it in context. Where we see it, we take very strong action. Bright Tribe was an academy trust—you know it well—where there were related party transactions that were concerning, and we took the schools away from it. We have seen people convicted in courts. That is our job.

Q48            Gillian Keegan: When the process comes up with the wrong answer, how do you feed that back into your processes to improve them? That is what I am trying to get to. You came up with the wrong answer, either on dodgy transactions or on fit for school. They have not had the right outcome. How are you feeding those learnings back?

Jonathan Slater: Mike referred to changes in the process of academising schools and of choosing which trust they should go into—changes that have been made on the back of the programme’s experience in the early years, in which, it would be fair to say, there was initially a focus on getting the programme under way. Some of the checks and balances that we now apply were not applied then—you learn from experience. The sort of checks that Sir David Carter oversees were not in as fully when the programme was at an earlier stage.

Q49            Gillian Keegan: It seems that you were more worried about getting the thing going than getting a quality system in place.

Jonathan Slater: I think the Department has learned from experience that some of the trusts grew too big too quickly.

Q50            Gillian Keegan: With the high degree of related party transactions, it is almost designed to attract the wrong behaviour in some ways, don’t you think?

Jonathan Slater: It is important to get the balance right here. As I say, related party transactions cover a multiplicity of different issues—

Q51            Gillian Keegan: Could you not separate them out into for-free and for-profit? That would be a good place to start.

Jonathan Slater: Any for-profit related party transaction is not allowed—is in breach—and we will take action against a trust if anybody is making any profit from any related party transaction. I absolutely agree that that is a key distinction.

Mike Pettifer: They have to go through a tendering process. As part of that, they have to provide evidence that their service is being delivered at cost.

Jonathan Slater: And that is what the independent auditor of the school does. If we have any concerns arising from that, we investigate.

Q52            Chair: Why is it ever right for someone to use someone they know so intimately, like a family member, to take on a contract? Even if you go through the tendering process, that is an in-built advantage for the person with the inside knowledge.

Jonathan Slater: It depends on the circumstances. I referred to local governors offering a service for free, which is a related party transaction. A church diocese offering a service to schools in its diocese is a related party transaction. A school providing improvement services for another school in its MAT can often be a related party transaction.

Q53            Gillian Keegan: I think we need to separate out those ones from the ones that are clearly—

Jonathan Slater: I agree.

Gillian Keegan: Having been a procurement manager, “at cost” is whatever you say it is—it just needs to be justified to some degree—because I am in control of the costs and you are not. The reality is that you have a system that is open to abuse—some is ongoing. The Durand Academy has obviously been discussed many times; it is related to my constituency. You will be interested in the lawyers they are using. The legal fees are now £600,000 or something. They have gone up threefold. You have no control over this use of public money.

Jonathan Slater: We do seek to distinguish between those where people have procured properly and made a profit or not. If they have not procured it or if they have made a profit, we come in hard. It takes a long time to close down the Durand Academy, but it is closing this June.

Chair: Ms Keegan’s point is that if you are the person setting the contract, you can name the cost, name the value and make the judgment. That is a really powerful position. In most other organisations, you would not be able to give business to someone that you are related to or live with.

Q54            Gillian Keegan: It would exclude you in most business contracts. It would exclude you from being a provider in most cases, whereas in this case it is actively encouraged by the sound of it.

Jonathan Slater: Related party transactions obviously do apply in business.

Q55            Gillian Keegan: Not to this extent, where somebody who is involved on the board or in the executive management has a separate company providing services. I honestly do not think that that is very common in the business world.

Jonathan Slater: I was just making the point that the concept is not unique.

Q56            Chair: If it is a small family business they can contract with whom they want, but this is taxpayers’ money.

Jonathan Slater: Yes, so, unlike a business, precisely because it is taxpayers’ money, we require them to demonstrate to the satisfaction of their own auditors and to us that they have not made any money out of it. That is what we required.

Q57            Gillian Keegan: The system is set up to encourage them to be able to make money out of it, but it is hidden in a cost. That is how it is set up. That is why you are seeing so many examples of it. I encourage you to consider separating out those services that are genuinely given for free or not for profit and those that have any commercial angle to them, and to consider whether you can learn more from the many examples that have been brought up here today.

Jonathan Slater: Having to take that challenge is the distinction we seek to draw in the work that we do. I take the point that the Committee is not convinced that we are distinguishing adequately between at cost and not. I will take that away.

Q60            Gillian Keegan: It just seems to be a remarkable coincidence that the people who are trustees are also the people who have leisure centre services or legal services. Which comes first? You seriously need to look at some of the incentives that arise, and learn from that.

Jonathan Slater: I take the point that is being made and will reflect on what I am hearing.

Q61            Gillian Keegan: On that happy subject, let us move to levels of pay. How do you compare levels of pay across the sectors? How do they compare to local authority levels of pay?

Jonathan Slater: I can unpack this. I shall keep it short, and then you can take it further. The average local authority maintained head teacher gets paid about 88 grand. The average academy head teacher gets paid about 92 grand. That is one piece of data. We require all academy trust accounts to include the names of any trustees and how much they get paid. That is why we report here, and where we see data that we think is odd, we take action.

Q62            Gillian Keegan: Ms Milner, I think you sent a letter to trusts in December asking them to explain their levels of pay and to give some kind of rationale. Have you had any response to that?

Eileen Milner: One of the very first things that I did on taking up post was to write to the chairs of governors of 29 single academy trusts where we could identify from the accounts that they were paying at least one person more than £150,000, asking them to provide an explanation of why that was, in their view, a sensible thing to do. The reason for doing that—it has ministerial sponsorship—is that all academy trusts are governed by the academies financial handbook: the rules, if you like, about what you can and cannot do. That sets out that the boards of trustees must ensure that their decisions about levels of executive pay follow a robust, evidence-based process and are reflective of the individuals’ role and responsibilities. Given that a SAT by definition has only one school in it, those 29 trusts seemed like a good place to start.

You asked about the responses so far. I would say that of the 29, a third have provided me with responses that I find reasonable and am reassured by. I am not so reassured about the other two thirds, and I will be inviting the chairs of governors in to see me to explain why they feel that these salaries are appropriate. I hope you take some assurance that we are acting first to understand, but then to challenge, particular situations.

Q63            Gillian Keegan: Is that just at headteacher level, or are you doing that analysis for other parts of the pay scale?

Eileen Milner: What academy trusts have to do, in terms of what they must make public and disclose, is identify how many members of their staff are paid more than £60,000, in bands of £10,000. That allows for a degree of accountability. Beyond that, all trustees—bearing in mind that either a chief executive or a headteacher will almost always be a trustee of a SAT or a MAT—are named and you can see what their remuneration package is.

In the first instance, we are particularly interested in looking at those where the levels are more than £150,000. As I say, that is the beginning of asking academies to be transparent and publicly accountable for what is set out for them in the handbook to which they sign up as part of their financial agreement with us. That is where we are starting.

Q66            Gillian Keegan: This is not only interesting regarding the use of public money for academies; it is also potentially changing the marketplace for salaries for headteachers, teachers and so on. Given that 75% of the cost of any school is teaching salaries, and given the nature of that going up over time and the pension clicker going over time, it seems that if this is going to be driven up and the marketplace is going to change, every school will find it difficult to keep within their budgets, as they have stochastic parts of their budgets, which are their salary costs going up year on year.

Jonathan Slater: There is a choice to be made—yes, it is a ministerial choice—on the balance between, on the one hand, giving trusts the freedom to pay people whatever they want and, at the other end, us deciding how much they should all get paid. You have heard from Eileen about an increased amount of pressure on salaries paid above £150,000. They are exceptional; 96% of trusts do not pay anybody more than £150,000. That is the focus of attention here.

Equally, if the ESFA finds an individual trust in financial difficulties and that is partly because of what it is paying its people, it takes action and persuades the trust to reduce its pay. I would expect the pressure to increase. I would not expect those salary levels to continue increasing in the way you have suggested. Academy headteachers’ salaries have gone down by about 0.5% in the last 12 months.

Q67            Gillian Keegan: With all this data you now have, do you have an easy way of correlating performance and salaries?

Jonathan Slater: I cannot claim to have a comprehensive analysis of that. It is one of the questions that is asked. If you were looking for a justification of why an academy trust was paying a particular amount of money, one of the things you would look at would be the difference that individual had made to the trust. But I do not have a formal correlation.

Q68            Chair: You do not look at the progress 8 score, or anything like that.

Jonathan Slater: No. In individual cases, you would look at whether a possible justification for a high salary might be the particular contribution that person had made, as evidenced by performance. But I am not in a position to say, “Salary X delivers performance Y.”

Q69            Gillian Keegan: This is the last question from me. Bearing in mind that this is a relatively new approach, at what point do you consider that the multi-academy trusts may become super-sized ones—too big to fail—and how are you monitoring that?

Jonathan Slater: We are taking a lot of care, as multi-academy trusts become larger, and doing the sorts of checks that Mike was describing earlier, which we used not to do and which are designed to make sure that we are making these decisions carefully.

Q70            Gillian Keegan: I am not sure that I got an answer there. How are you going to analyse at what point they are too big to fail? We have enough experience now of consolidation or over-consolidation. Basically, the risk is back on the Department.

Chair: How many people are going to have to go through what Wakefield academy trust’s pupils went through?

Jonathan Slater: No trust is too big to fail. If it fails, it fails, and we take action to protect the children from those schools.

Q71            Chair: Ms Keegan is being very clear, but let us just be really clear. If one school fails, that is challenging, but you can resolve it. But if you have a multi-academy trust fail, that is several schools and thousands of pupils. That is the point Ms Keegan is trying to make. This is a bigger scale of failure—a bigger impact on more people.

Gillian Keegan: And you assume that it will be financially challenged, and that the money has gone with it.

Jonathan Slater: Yes. Mike will talk through this in more detail, but what I am saying is that we are really careful now as trusts take on schools to try to minimise the chance of anything going wrong, but I can’t say that it won’t.

Mike Pettifer: You talked before about learning lessons, and that is what we have been doing. The national schools commissioner and the regional schools commissioners work with us really closely and we look at the finances, school improvement and educational performance together. The national schools commissioner looks at the top 10 largest trusts, meets with them regularly and follows their progress. We look at the financial reports and feed into that. That happens, again, at the regional schools commissioner level. My local teams will feed in to the regional schools commissioners’ intelligence on educational performance, leadership and management. They are monitoring much more closely. To stop growth before capacity they have MAT growth checks in place, and they now look at all the evidence of the actual financial capacity and capability in terms of the educational improvement resources they have in place before they grow. There is much more rigour applied to this than there was previously because we have been learning lessons from some of the cases you have referred to today.

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