The academy programme will create “significant risks” if the Department for Education fails to strengthen its financial accounting, the government’s audit watchdog has warned.

The National Audit Office has found “material and pervasive” levels of “error and uncertainty” in the DfE’s accounts, published today, for the third year running.

A report from the NAO published today says that in 2015-16 the DfE:

• Overspent against its capital spending budget by £115.9 million - significantly more than last year’s £31.2 million overspend;
• Breached its Resource Annually Managed Expenditure Limit, which includes pension costs, by £175.1 million - against last year’s £101.4 million;
• Partly based its annual return on academy accounts covering the academic year ending 31 August 2016, while its own accounts covered the financial year ending 31 March 2016. This was against international financial reporting standards;
• Failed to demonstrate that its estimates for the value of land and buildings held by academies was accurate.

However, the report also identifies significant improvements in the department’s accounting for capital projects.

The uncertainty in the financial statements “limits the ability of Parliament to identify the actual spend by the academies sector for the year in question”, says the report.

For future years, the DfE has agreed to provide a separate set of accounts for academies, and it is expected to confirm in February 2017 whether this will be possible for its 2016-17 accounts.

The report says: “The department’s policy of autonomy for academies brings with it significant risks if the financial capability of the department and academies are not strengthened; and if the financial statements do not present a true and fair view and meet the accountability requirements of Parliament. This will become even more significant in the context of the continuing expansion of the academy sector.”

Amyas Morse, comptroller and auditor general at the NAO, said: “The department has many challenges to overcome if it is to implement successfully its plans to provide Parliament with a better picture of academy trusts’ spending next year.”

It is very rare for the NAO to issue a “qualified” or “adverse” opinion on a public body or government department’s accounts.

A DfE spokesperson said: “Academies are subject to a rigorous system of accountability and oversight, tougher and more transparent than maintained schools. This is reflected in the NAO’s finding that there are no material inaccuracies in individual academies’ statements. However, the consolidation of thousands of those accounts into the format required by Parliament is one of the largest and most complex procedures of its kind.

“All of these accounts are published individually by trusts ensuring they can be held to account by the department and the public.

“We recognise the challenges with the current format and have developed a new methodology for the 2016-17 financial year, which the NAO has said will provide a solution to a number of these issues. With the Education Funding Agency’s rigorous oversight of the academy system and the expanding role of the regional schools commissioners, we are confident that the accountability system for the expanding academies programme is robust and fit for purpose.”

The findings follow a heavily critical report by the NAO on the DfE’s approach to managing schools’ financial sustainability.

EFA finds ‘cases of financial irregularity’

The disclosures were made as the Education Funding Agency’s (EFA) annual accounts were also published.

They show that the EFA has issued 13 financial notices to improve to academy trusts, and two to sixth-form colleges, in 2015-16.

The EFA’s report says that it has found “several cases of financial irregularity” in academy trusts, including:

• Some 25 related-party transactions where academy trusts were “unable to demonstrate full compliance with our requirements”, and
• Some 25 severance payments by two trusts that were made without prior approval from the EFA and Treasury, as required. The trusts were under a financial notice to improve, and so their normal delegated authority to make these payments had been revoked.

It also reveals that, since April 2012, the EFA has received 195 reports from whistleblowers about “allegations of a financial and or governance nature”.  The EFA says there was not enough evidence for a formal investigation in “a number of cases”, but adds that it will publish reports on any formal investigations.

The report also shows that the EFA is still considering the Durand Academy Trust’s response to a notice to terminate its funding.

Local authority funding revealed

Separately, the amount of government funding being allocated to each local authority in 2017-18 was also published this afternoon. An additional £130 million for the “high needs block” of funding was announced.

The government confirmed at the same time that local authorities will receive transitional funding, while the Education Services Grant is being phased out, at a rate of £66 per pupil. As previously announced, this will be paid from April to August 2017, before being scrapped.

Detailed proposals on the new national schools funding formula, which will standardise the way schools are funded across the country, were published last week.

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