Auditing school contracts with ‘connected parties’ difficult, watchdog warns

Paul Snell is managing editor at Supply Management
19 November 2014

It will be difficult to establish whether academy schools will be compliant with guidance from the Education Funding Agency (EFA) when buying goods and services from suppliers with connections to employees, the National Audit Office (NAO) has cautioned.

Restrictions published in November 2013 say academy trusts, responsible for a number of schools, cannot enter into transactions with “connected parties” unless they can be “satisfied” the supplier is not profiting from their relationship.

“Trusts must ensure that any such ‘at cost’ arrangements is properly procured and supported by a statement of assurance from their relevant contractor that its charges do not exceed the cost of the goods or services,” it said, adding there should be an open book agreement to clearly demonstrate charges do not exceed the cost of supply.

Following an investigation into the EFA’s oversight of potential conflicts of interest at an academy trust, the NAO said the measurement of “cost” or “no profit” was subjective and would be “difficult to evidence and audit”.

“This will become especially difficult when accounting for the purchase of professional services, where the academy is effectively buying-in and experts time and knowledge rather than goods with a historic cost.”

In spite of further guidance from the EFA, the spending watchdog warned auditors were concerned how it could be applied.

“Related party transactions are a big issue and my Committee has told the EFA it needs to get to grips with some of these dubious business relationships,” said Margaret Hodge, Labour MP and chairwoman of the Public Accounts Committee.

She added that in 2012-13 43 per cent of academy trust financial statements revealed related-party transactions, with £8.6 million representing a risk to value for money.

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