Welcome to the Spring issue of our termly briefing for academies. As in previous issues we focus on issues of topical importance to academies, whether they have converted from maintained school status or are sponsored institutions.

Preventing Fraud

Spearheaded by Secretary of State for Education, Michael Gove, the Coalition Government has provided schools with greater autonomy by giving management increased control over curriculum choices and the administration of finances. The proliferation of Academies and an increasing of schools’ independence from Local Education Authority (LEA) governance are clear products of the reforms, set out in the Schools White Paper, The Importance of Teaching, published in November 2010. However, in its recent publication, ‘Protecting the Public Purse 2012’, the Audit Commission has highlighted the increased risk of fraud within the schooling system as a result of these reforms.

Of little surprise to fraud prevention specialists, vesting control over substantial finances within an organisation without very robust systems to monitor and record decision making is opening the door to fraud.

The Audit Commission has rightly urged all schools to review their whistle-blowing and fraud prevention policies and procedures. Driven by the Bribery Act 2010 and the increased risk of wrongdoing in straitened economic times, many private sector organisations have invested heavily in improving their anti-corruption and compliance procedures. The education reforms together with the tough economy pose similar risks of fraud for schools. The Audit Commission’s recommendations should certainly be acted upon.

The result of poor financial controls was highlighted in 2011 when a Finance Manager at a School in Walsall, West Midlands, was jailed for three years and four months for stealing more than £288,000. The Finance Manager forged the deputy head’s name on cheques, and over a period of four years signed 140 cheques. The fraud was only spotted when a financial adviser found that the school accounts should have been £70,000 in credit rather than £14,000 in the red.

As part of his 2010 reforms Michael Gove, announced the end of the current Financial Management Standard in Schools (FMSiS) and a new, simpler standard. The FMSiS required all school accounts to be signed off by an independent auditor. Now only Academies have to be audited externally, with all other schools free to do their own accounts without external supervision. The removal of this control may well lead to an increase in fraudulent activity in schools.

The Audit Commission’s guidance note, ‘Fraud risks in schools: advice for school governors’ highlights particular types of risks for schools:

  • fraudulent claims of wages and overtime;
  • fraudulent contracts and payments to contractors;
  • misappropriated school trip funds or petty cash; and
  • Insufficient scrutiny by senior management, governors and internal audit.

If further financial scandals (and the consequential fall-out when the money cannot be recovered), reputational damage and enforced resignations are to be avoided this increased autonomy of school management teams will need to be complemented by rigorous internal control systems. The Education sector is widely believed to be insufficiently protected against fraud and corruption. The consequences of being caught out can be devastating, and preventative action is always significantly cheaper than having to clear up a problem after the event.

Governance: managing governors' conflicts of interest

Academy governors, as directors of the academy company, are subject to a number of statutory duties which are set out in the Companies Act 2006. One of these statutory duties is to avoid actual and potential conflicts of interest. The duty to avoid conflicts also arises under charity law. Further, governors (who are the trustees of the charity) are not permitted to receive any benefit from the charity unless there is an express authority in the Articles of Association or legislation permitting them to do so (or unless such authorisation is sought from the Charity Commission or the court).

A conflict of interest is, in basic terms, a situation in which a governor’s personal interests (or the interests of a person connected with the governor) conflict with the interests of the academy trust. A conflict of duty is where a conflict arises as a result of the governor owing duties to other organisations under company and/or charity law (for example, as a result of them being a director and/or trustee of another organisation).

Under company law, there is an obligation on all governors to declare any potential or actual conflicts. Importantly, as the duty on governors extends to avoiding potential conflicts, conflicts should be declared in advance; a governor should not wait until a situation of conflict has actually arisen. As a result, governors need to be conscious of conflicts at all times. They should consider whether there is anything or any connection which could potentially divert their mind from giving sole consideration to promoting the success of the academy trust. This will help each governor to establish whether they are in a position of potential conflict.

The duty to declare conflicts is reflected in Article 98 of the Department for Education’s (“DfE”) model Articles of Association. The Articles states that:

“a governor must absent himself from any discussions of the governors in which it is possible that a conflict will arise between his duty to act solely in the interests of the Academy Trust and any duty or personal interest.”

As an academy trust is a charitable company, only the board of governors may authorise conflicts, but this is only permissible if there is an express provision in the Articles of Association allowing the board to do so. When authorising conflicts, governors must consider their own statutory duties by, for example, considering whether authorising the conflict is in the best interests of the academy trust.

Our top tips for managing conflicts

  • Ensure you have a clear policy relating to conflicts of interest and that all of the governors are aware of the policy and have read it thoroughly.
  • Ensure governors are aware of their duty to report potential conflicts; not just conflicts that have already arisen.
  • Ensure that conflicts of interest are a standing item on the board meeting agenda and are discussed at the beginning of every board meeting.
  • Take thorough minutes of board meetings.
  • If a new governor is appointed, ensure that they go through a formal procedure of providing details of actual and potential conflicts.
  • Keep registers, both of any conflicts declared and any conflicts which the board has authorised, including the date such authority expires (if relevant) and any restrictions or limitations on the authority.

Interestingly, there is no power in the DfE’s model Articles of Association allowing the board to authorise conflicts, nor is there any procedure for doing so. There are only provisions relating to the declaration of conflicts. As academy trusts now have the discretion to amend their articles without DfE approval, it may be possible for the academy trust to add a power for the board to authorise conflicts. However, there will be limits to what the DfE will allow, so legal advice should be sought before doing so.

Eversheds intends to consult with the DfE to see whether provisions regarding the authorisation of conflicts should be added to the model Articles of Association.

Independent Schools and Academies

In order to retain their charitable status and the benefits which are derived from this, Independent schools must demonstrate that they are acting for the public benefit for the purposes of the Charities Act 2011. Currently, many independent schools demonstrate this through initiatives such as the provision of bursaries, sharing of facilities with state-funded schools and preparing students from the state sector for university interviews.

Lord Adonis, the former Schools Minister and architect of the academies programme, in the autumn appealed to private schools’ “professionalism and charitable missions” to step up their involvement in state-funded education, principally through joint leadership of local academies. He noted that while private schools have increased the number of bursaries provided (almost 40,000 means-tested bursaries were provided in 2011/2012), a more radical initiative was required to improve education standards nationwide. Only a small number of independent schools, such as Wellington and Brighton College, had so far agreed to sponsor academies. However, more recently Eton College, which already co-sponsors a sixth form college in East London, has announced that it will sponsor a new state boarding school which is to operate as a free school. It will be interesting to see whether other independent schools follow Eton’s lead.

Meanwhile a number of other independent schools, finding that the current economic climate has caused a reduction in demand for places, have been prepared to consider alternative sources of revenue. Conversion to an academy or free school brings funding direct from the Department for Education. Free schools are independent, though in a different sense from fee charging schools; while they are publicly funded (and accountable to central government) they have independence from local authority control. On a practical level, free schools retain the ability to sculpt their own curriculum, set term dates, determine pay and conditions for staff and retain control over their own governance. Though treated similarly in law to academies, academies are typically derived from pre-existing state schools, with free schools tending to be newly-created institutions. Batley Grammar School in West Yorkshire, Priors School in Warwickshire and Moorlands School in Luton are recent examples of independent schools which have now converted to take advantage of state funding.

Of course, there are many issues for governors to consider when deciding whether it would be appropriate for their institution to be converted into a free school. For instance, though direct funding from the Department for Education will create enhanced certainty, it may be that the local community will prefer the institution to remain truly independent. Similarly, free schools may present an opportunity to change staff terms and conditions, though this has the potential to create disruption.

In any event it is likely that state and independent schools will work more closely together in the future, cross-fertilising good practice across the schools sector.

Changes to teachers' main pay scale

Background

The School Teachers’ Pay and Conditions Document (“STPCD”) provides that once teachers employed by maintained schools and local authorities have achieved qualified teacher status, their annual salary will start on the main pay scale, usually at M1 with a minimum starting salary of £21,588 per annum in England and Wales or £27,000 in inner London.

Teachers are awarded a pay rise when the pay scales and allowances are updated. In addition, each September, teachers on the main pay scale, subject to satisfactory performance, move to the next point on the scale until they reach the maximum M6 point. Qualified teachers who reach M6 can apply to be assessed against eight national standards and, if they meet the standards, can cross the ‘threshold’ to the upper pay scale. The threshold provides an opportunity for teachers to progress from the main pay scale to a higher salary range without holding a management position. Teachers on the upper pay scale receive a salary rise when the pay scales are increased. However, progression on the upper pay scale is performance based and governing bodies make the decisions on progression based on recommendations from Head Teachers, whereas progression on the main pay scale occurs routinely on an annual basis.

The proposal

On 5 December 2012 Chancellor George Osborne announced reform to teachers’ pay based on proposals set out by the School Teachers’ Review Body.

The proposals recommend a move to link teachers’ pay with their performance by giving Head Teachers flexibility to award pay increases between the minimum and maximum levels based on whether the teacher meets the new "teachers' standards" to be published in September. The proposal will therefore mean that there will no longer be annual pay rises effectively based on years of service. Other key changes include:

  • The replacement of the detailed threshold referred to above.
  • Schools will be given more discretion to offer recruitment and retention allowances and to create posts at the higher end of the pay scales.

Whilst it would seem that the intention behind the proposal is to make it easier for Head Teachers to recruit and reward the most talented teachers and to respond more flexibly to local needs, the proposal has been widely criticised by teachers’ unions as an attempt to reduce teachers’ pay and further erode their members’ rights.

Members of NUT and NASUWT have already been participating in industrial action in opposition to working conditions by “working-to-rule”. Union leaders are now reported to be discussing further industrial action in response to the proposal. Mr Gove for his part is said to be considering new anti-strike laws. Battle lines are being drawn.

What does this mean for academies?

  • Although STPCD does not automatically apply to academies, many teachers who transferred to academies under TUPE will generally continue to be entitled to be paid according to the pay structure and pay scales set out in the STPCD. If implemented, the proposals will give academy leaders more flexibility in relation to the management of reward and recognition of teachers and may afford an opportunity to harmonise pay between teachers benefiting from STPCD and those who do not.
  • The threat of industrial action is a real one. Academies need to consider the extent to wish they want to challenge such action. Ballots for action that pre-dated conversion to academy status are unlikely to have survived the TUPE transfer and may not, therefore, cover the staff of some academies. There may also be other grounds on which industrial action can be challenged and advice should be sought if there is any doubt about a particular case.
  • A recent YouGov survey revealed that 62% of academy teachers polled described morale as low or very low, academies will need to tread carefully when it comes to reviewing pay if they wish to avoid deteriorating employee relations and industrial unrest.