Academies - Financial practice under scrutiny

My article back in June Academies: Changing the school procurement landscape provoked a number of comments back and has clearly struck a chord with Education Business readers.

That article focused mainly on procurement and on the considerable reputational risks that go with any mishandling of public money, whether deliberate (as in the case of fraud) or through some well-intentioned but naïve and incorrect approach to financial management. Since then, a couple of developments have indeed resonated with the comments I made then. First, and most importantly, there has been the Public Accounts Committee (PAC) report: Seventeenth Report: The Academies Programme. While this report welcomed “the impressive progress made by the Programme of sponsored academies to date” it expressed the worry that “academies’ educational achievements should not be undermined by poor stewardship of the public funds necessary to sustain the impacts of the Programme” and that there are “increased risks to value for money and proper use of public money”.

Inadequate financial controls
The PAC is the body appointed by the House of Commons specifically to examine the accounts for public spending – so their comments and recommendations certainly carry weight. The report on the Academies Programme went on to flag up that “Many academies have inadequate financial controls and governance to assure the proper use of public money” and to recommend that it should be made compulsory for all academies - sponsored or converter - to comply with basic standards of governance and financial management. This should include the segregation of key roles and responsibilities, and the timely submission of annual accounts.

The other headline event has been the resignation of Richard Gilliland, chief executive of the Priory Federation of Academies. The BBC quoted the Department for Education (DfE) as saying that his departure was due to the result of an investigation into financial management. The findings of that investigation have not been made public but I understand that spending irregularities were involved. And these must have been significant – because the DfE has also referred the matter to the police.

The local press has reported that the investigation discovered “that Gilliland had used resources of the publicly funded federation to buy personal and “inappropriate” items [sex games], including training for his son, personal tax advice and DVDs”. Mr Gilliland was until his departure one of the county’s highest paid public servants, earning over £200,000 a year.

The Education Funding Agency, which carried out the investigation, expressed its concerns about the academy trust’s “poor financial management and misunderstandings on responsibilities as to whether expenditure incurred was legitimate.”

Issues with autonomy
Of course this is not the only case of fraud in academies or schools, but the difference is that the autonomy of an academy means that it is not obliged to notify the local authority. So in cases such as this where does the academy go for support?

The above developments go to show just how important it is for academies to be able to access some reliable and professional support, especially during their setting process and their early days as newly fledged academies. Fortunately, such professional support is available in several forms.

CIPFA is the world’s only professional accountancy body to specialise in public services; we have close links with both local and central government. We research and advise on a number of issues and agendas affecting education finance and are heavily involved in the academies agenda.

We have produced two publications ‘Effective Governance and Financial Management’ and also ‘Accounting for Academies’ to assist academies in this agenda.

We also offer a wide range of training on academy financial reporting, governance, procurement and fraud. This includes one day workshops, onsite training and also accredited finance courses. There’s further information on our website at:

Leases - Knotty issues
Feedback that I’ve received strongly suggests that another area of financial management that some academies are having difficulties with is that of leases. Leases can involve some knotty issues at the best of times and were of course generally dealt with by the local authority in a school’s pre-academy days.

With leases, the first thing to get clear is the difference between a finance lease and an operating lease. A finance lease is defined as follows: “A finance lease is a lease that transfers substantially all the risks and rewards of ownership of an asset to the lessee. It should be presumed that such a transfer of risks and rewards occurs if at the inception of the lease the present value of the minimum lease payments including any initial payment, amounts to substantially all (normally 90 per cent or more) of the fair value of the leased asset. The present value should be calculated by using the interest rate implicit in the lease (as defined in paragraph 24). If the fair value of the asset is not determinable, an estimate thereof should be used.”  [source: paragraph 15, Statement of standard accounting practice (SSAP) 21]

It is important to note that the test for whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than its form (or description). Situations that would normally lead to a lease being classified as a finance lease include the following: the lease transfers ownership of the asset to the lessee by the end of the lease term; the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than fair value at the date the option becomes exercisable and that, at the inception of the lease, it is reasonably certain that the option will be exercised; the lease term is for the major part of the economic life of the asset, even if title is not transferred; at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset, and; the lease assets are of a specialised nature such that only the lessee can use them without major modifications being made.

In a nutshell, essentially, a lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. All other leases are classified as operating leases.

The important point about a finance lease is that it counts as borrowing – and the normal policy of the funding and regulatory agency is that academies should not be granted permission to borrow. An academy would therefore need explicit approval for any borrowing, both short-term borrowing (including overdraft facilities) and medium/longer-term loans from the private sector (including finance leases or hire purchase agreements), where such borrowing is to be repaid from a government grant or secured on assets funded from government grant. Even finance leases for minibuses may need approval by the funding and regulatory agency.

Turning to accounting for operating leases – another area of some confusion - the rental under an operating lease should be charged on a straight-line basis over the lease term unless there are reasons to believe that some other more systematic and rational basis is more appropriate. As mentioned above, academies should not enter into finance leases as they represent borrowing.

Some academies may occupy land or premises owned by other bodies for which no annual or a nominal rental payment is made. In these circumstances the current value on receipt of the asset should be credited to the restricted fixed asset fund account in the statement of financial activities with details of the terms of the lease included as an additional note to the fixed asset note.

Further information
For more detailed guidance, read CIPFA’s publication Accounting for Academies: Business Solutions for Financial Reporting. This contains a number of worked examples covering different scenarios around accounting for operating leases.