Updated Academies Financial Handbook and new salary disclosures for maintained schools

Executive Pay

The Government’s drive to keep the salaries of senior officers in check continues and we are aware of more letters this summer having been sent to academy trusts seeking assurance as to the academy trust board’s oversight of executive pay, ensuring pay levels are “transparent, proportionate and justifiable” and that this can be evidenced. It is likely a similar focus will now be directed at maintained schools with the introduction of the School Information (England) (Amendment) Regulations 2020 which will come into force on 1st January 2021. This requires all maintained schools to:

• publish information relating to the number of school employees who earn £100,000 or more, shown as the total number of those employees falling within salary bands of £10,000; and
• publish a link on the school’s webpage to the online Schools Financial Benchmarking service maintained by the Department for Education.

This echoes a similar obligation on academy trusts who are required to publish this information on their websites from 1st September 2020.

A key requirement of the Handbook is that academy trust boards must ensure that decisions about executive pay and benefits reflect independent and objective scrutiny and that conflicts of interest are avoided. This has tended to result in the creation of executive pay committees and the commissioning of independent pay reviews and it may be that we will see more of that in the maintained sector (notwithstanding the School Teachers Pay and Conditions Document), particularly for voluntary and foundation schools where the local authority is not the employer and traditionally will have had no involvement in the setting of pay and agreeing benefits (which for this purpose includes salary, other taxable benefits e.g. pensions and termination payments but not the employer’s own pension costs).

The Handbook also now requires both the accounting officer (the most senior executive officer) and the chief financial officer to be employees and in the case of the CFO to hold a business or accountancy qualification for a relevant professional body.

The ESFA continues to tighten up financial processes and procedures, with an increased emphasis on audit, both internal and external. The audit committee must now also report to the academy trust board on the controls and risk assessments around non-financial risks as well as financial risks and are allowed to invite on to the committee individuals whose experience is not solely financial in order to ensure a broader, more holistic review of risk is taken. At the same time, the ESFA has published new guidance on “Operating an academy trust as a going concern” to support academy trusts and auditors on how to manage financial risk in light of the continued pressure on school finances. We expect to see more challenge and scrutiny from external auditors and internal audit committees.

New Accounts Direction

A new Accounts Direction 2019/2020 has been issued in response to the coming into force of The Companies (Miscellaneous Reporting) Regulations 2018. These apply to all charitable companies (i.e. academy trusts) and for all reporting periods on or after 1st January 2019. The Regulations require companies to include new content in their annual reports. In particular the Regulations require the Directors (the Academy Trustees) to include in their annual report how they have complied with their duty set out in section 172 (1) (a) – (f) of the Companies Act 2006 to act in good faith and in a way which would be most likely to promote the success of the charity (the academy trust) to achieve its charitable purposes, having regard to the following:

• the likely consequences of any decision in the long term;
• the interests of the trust’s employees;
• the need to foster the trust’s business relationships with suppliers, customers and others;
• the impact of the trust’s operations on the community and the environment;
• the desirability of maintaining a reputation for high standards of conduct; and
• the need to act fairly as between Members of the trust.

These are significant duties and whilst in most cases Trustees will meet this duty, the growing emphasis on the breadth of the duty and the need to demonstrate compliance may require academy trusts to rethink how they approach strategic planning and decision making, perhaps by having systems in place to ensure that any decision is actively considered in the light of each of these areas. We would recommend that clerks to academy trust boards (which all trusts must now have as a consequence of changes to the Financial Handbook) have regard to this and that trusts ensure their Trustee code of conduct emphasises this duty, prompting questions potentially by the Members where Trustees cannot demonstrate this. The many challenges facing schools at the moment highlights the importance of an academy trust board that works together in harmony, where there is healthy debate but consensus decision making and an acceptance of what collective responsibility really means. We have been involved in a number of crises and investigations where a breakdown in governance has been the defining feature and the fall-out from these can be damaging, costly and time consuming to repair.

Legal Spend

The new Accounts Direction also requires academy trusts to report on legal spend, broken down between spend on academy conversions (for MATs) and other matters, noting in particular spend on litigation. There have been a couple of high profile examples recently where academies have been criticised for incurring big legal bills to pursue rights which in some cases have been unsuccessful and the ESFA will have been concerned to see whether there was proper decision making and cost control. Clearly, it is much harder to control expenditure when a school is defending itself against any legal action (albeit its usual for us to provide a full breakdown of costs and an assessment of merits where the RPA is funding legal costs), but when remedies are being pursued the trust must ask itself whether there is a genuine public interest in doing so. This can be a difficult call particularly where, for example, a school or its staff are being attacked unfairly and publicly on social media and the reputation of the school is at stake.

Governance

Despite the focus of the Financial Handbook on financial matters, it provides quite a bit of advice and indeed regulation of governance matters. This is partly because academy trusts are required to comply with the Handbook (it is in effect statutory guidance) but are only encouraged to comply with the DfE’s Governance Handbook which in fact hasn’t been updated for some time. The Financial Handbook therefore has stressed again the role of Members of an academy trust and that they must not be employees of the trust. From 1st March 2021, this includes “staff establishment roles on an unpaid voluntary basis”. Arguably these individuals are not “employees” given they are not paid, but any role which is typically treated as a staff role even though it is not paid will be treated as an employee for the purposes of restricting their ability to serve as a member. This may have some significance for academy trusts which have responsibility for schools with a religious character. It is clear that the ESFA expect the role of the Member to be a significant one and for Members to be more involved in the oversight of management and risks. This chimes with the expectations of the Charity Commission and recent carse law. Click here to view a more detailed analysis of the role of the Members is set out.