The old boys network

When you look at it in detail, the similarities between Nick Gibb and I are too many to ignore.

  • We were both born in 1960.
  • We were educated at all-boys grammar schools.
  • We both attended university where we were members of radical student political organisations.
  • After university we both trained and qualified as chartered accountants. Both of us working at KPMG in the mid to late eighties.
  • We are both tonsorially challenged.
  • We have both performed on the stage in the hall at Raines Foundation School. In my case it was in the seventies, when the school was Parmiters. I played the role of Blueskin in Jack Sheppard, a tragi-comic play which, whilst based on real events is obviously a work of fiction. In 2014 Nick gave a speech at a ResearchEd conference, talking about the DfEs commitment to evidence based policy.

As you can see, there are many, many similarities.

For the purposes of this post the key crossing point is in the eighties at KMPG. Obviously as a trainee accountant you learn a lot of different things, but underlying all the training I received was the central idea that as an accountant when you stripped away the technical knowledge all that was left was your integrity. If you didn’t have that then your worth as an accountant was limited. We were taught that there was the law, and then there was the line, the line you didn’t cross. And you hit the line before you got to the law. Now I have never met Nick Gibb. I mean, we may have walked past each other at some time in Dorset Rise, but we’ve never actually spoken. But I am fairly sure that having spent time in the same organisation at the same time that it shaped me that he would have come away with the same core sense of right and wrong.

So, to actually get to the real point of this post, I can imagine he is absolutely spitting blood when he has to deal with academy chains doing, shall we say, creative things with finance. In anyone’s book a public servant paying themselves a second salary out of public funds is a bit too much too take. Paying it out of another company raises the eyebrow further still. Funnelling the payment through two different companies? Well, that crosses the line. No, it’s not illegal. No laws broken. No tax evaded or even avoided. But it crosses the line. It offends my sensibilities.

Now I’m not naive enough to think that it’s only in academies where funds are misused. That’s lazy thinking. But it is the case that where it does happen in academies it becomes news and is not only damaging to the school in question, it damages every other person associated with academies. It tars them with the same brush. There are plenty of people out there with brushes looking for pots of tar. And from a government perspective it damages the policy they are trying to implement.

So, whilst I’m not a fan of the old boy network way of doing things, I thought I could offer my tonsorially challenged, ex-grammar school boy turned accountant counter-part some friendly advice.

It comes in three parts, the first two of which are connected.

The Academies Financial Handbook sets out the ‘musts’ and ‘shoulds’ of financial management of the trust. The handbook says the trust must appoint a suitably qualified Chief Financial Officer and that the trust must point as Accounting Officer the principal or chief executive of the trust. The section on the CFO is worth noting in full:

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As discussed in previous posts, a MAT can be a substantial undertaking. The above suggests that the CFO can be a part-time role carried out by someone with no accountancy qualifications. What needs to be considered here is not how this role should operate in a properly functioning, well run, well behaved organisation, but what is required of that person should this not be the case. And what sort of person is required to prevent issues arising in the first place. In some of these MATs (an increasing number) there are tens, even hundreds of millions of pounds of public funds being spent.

Here’s what I would like to see. There should be a minimum qualification level required. My preference would be (particularly in larger trusts) that this should be a chartered accountant. I would like to see for smaller trusts the development of a qualification supported by one of the chartered bodies that would be a minimum requirement for the CFO. I am aware that there are a number of school business manager qualifications available and I am open to be convinced that these are at an appropriate level.

I simply do not agree that the level of qualification of the CFO should be at the discretion of the board, which essentially means the CEO who hires them. What kind of CFO is a person who gets paid two salaries likely to employ? These are not private companies that get to do what they like. They are, like it or not, quasi-public bodies and should be expected to behave as such. Employing properly qualified personnel in key posts is part of that.

Which brings me on to the second change.

The accounting officer should not be the principal or chief executive. It should be the CFO. Making the chief exec the accounting officer puts far too much power into the hands of one person. By giving this role to a suitably qualified CFO there is a greater separation of powers within the organisation. As an accountant I was employed by my employer, but I owed my livelihood to my qualification, to the professional body that I was a member of. I wouldn’t cross the line, nor would I allow my employer to do so. And the key point here is that my profession provided a counter-balance to anyone who would seek to pressure me into doing something that crossed the line.

The third thing that I would change, and this may well have prevented the issue at Perry Beeches, is to make a quite technical change to prevent academies from relying on a legal opt out from FRS8. FRS8 is the financial reporting standard that sets out how related party transactions should be handled. The exemption is that transactions that would need to be disclosed as related party transaction need not be disclosed if they are between the trust and any of its wholly owned subsidiaries. “Hang on”, I hear you cry, “it’s a school, why would it have a wholly owned subsidiary, that’s got to be a sign of something wrong!”. Well, no. Many schools have wholly owned subsidiaries to manage sports facilities on their site. It’s a way of making it easier to deal with VAT and working with third parties. As I understand it one of the questionable salaries paid by Perry Beeches went through such a company. Because of the FRS8 exemption such transactions did not need to be disclosed and so it was not easily picked up.

It would be a simple thing for the Academies Financial Handbook to be amended to prohibit an academy trust from taking advantage of this (completely legal) exemption.

No technical changes, however well thought through, can guarantee that there will never be any financial malfeasance. Such wrongdoing is committed by people not systems. The aim of any system is to ensure that the greater the potential misappropriation the greater to number of people needed to be complicit to allow it to happen. I think the three changes I’ve suggested will help with that.