Have you ever been attracted by the financial freedom of academies but wondered what the drawbacks are? Gary Dawson guides you through the issues‘Academies embody all that we are seeking to achieve as a government, tackling social exclusion and transforming the prospects for the least advantaged in our society. My passionate belief is that educational success is the route to social justice.’
Those were the stirring words of former prime minister Tony Blair at the opening of the Bexley Business Academy in 2004. Four years later, his flagship academy programme has gone from strength to strength. There are now 83 academies open across the UK, and this number is set to rise to over 200 over the next three years. In this article I will consider the financial implications of becoming an academy and consider other pertinent issues surrounding the management of these state-of-the-art 21st-century schools. The aim of the article is to provide a comprehensive briefing showing the financial and other potential benefits that academy status could bring to your school.
What is an academy? An academy is a new school, publicly funded but with support from an external sponsor. Academies enjoy freedoms in certain areas of the school’s activities, the most significant of which is that an academy can determine the pay and conditions of its staff. In addition, academies have more flexibility and autonomy in terms of the curriculum, their admission policy and general management of the school. These flexibilities allow them to be at the forefront in applying school workforce reform strategies.
Academies have replaced schools that are deemed to be ‘weak’ or ‘failing’ by the government; they also meet the basic need for school places in areas of educational underperformance. An academy will always have at least one subject specialism and provide a teaching and learning environment in line with the best in the maintained sector. The government’s vision is that academies have a key part to play in the regeneration of communities – they provide a significant focus for learning for the students, their families and other local people, helping to break the cycle of underachievement in areas of social and economic deprivation. So surely everyone thinks that academies are a great idea? Not so. Anti-academy campaigners argue that they operate outside of the laws that apply to other maintained schools, diminishing the rights of students and parents. They also argue that the governing bodies of academies are controlled by the sponsor. If you really want to delve deeper into the anti-academy arguments, Francis Beckett’s publication The Great City Academy Fraud is an absorbing read. Whatever the merits of the arguments, rest assured that academies are here to stay! Even a change of government will make no difference – David Cameron has made it clear that, if the Conservatives are voted into power, the academies programme will not only be retained but will be expanded.
Legal status Each academy is set up as a company limited by guarantee with charitable status and will have a board of governors responsible for the strategic leadership of the school. In view of their charitable and company status, academies must comply with:
- company law as set out in the Companies Act 1985
- charity law and the requirements of the Charity Commission, including its ‘Statement of Recommended Practice’ which was revised in March 2005.
Company and charity law bring key requirements in terms of financial management: primarily that academies must prepare and publish their accounts in a prescribed format, and these must be independently audited by a registered auditor.
Financial implications So your governors have decided that they want your school to become an academy. What is the first thing you need to do? The first task is to secure sponsorship funding of £2m towards the capital costs of your new buildings or refurbishing your current premises. This seems like a daunting prospect, but the sponsorship can come from a wide range of sources, including businesses, faith groups and local authorities. If you can’t secure the full sponsorship, don’t despair! There have been a number of cases where academies have been established without the sponsors contributing the full £2m. The attitude of the Department for Children, Schools and Families (DCSF) towards this is quite relaxed, and in fact only last summer Ed Balls, the secretary of state, encouraged universities to become sponsors by removing the need for them to find the said £2m. In January 2008, he went a stage further by announcing a bonus for high-achieving schools that sponsor less successful schools to become academies. Not only will they be exempt from the £2m ruling but will actually receive £300,000 from the DCSF! So if you think you can clear the sponsorship hurdle, the next step is for your sponsor and your local authority to work together to prepare a formal Expression of Interest for consideration by the DCSF. This will be a document which will demonstrate the need for a new academy in your area. The DCSF will then, if all goes well, agree support for your academy project. At this stage, you will need to secure the services of a project management company to help you decide if becoming an academy is a viable option for your school. This company will submit detailed plans to the DCSF, including an educational vision and a proposed budget. If that budget is approved, you can then access what is known as Feasibility Funding. This funding supports such costs as the fees payable to the project management company, the costs of establishing the charitable company, as well as the costs of building design and legal fees.
Further funding Getting the green light to become an academy can take about two years. Assuming that you do get the go-ahead, what funding can you then access?
You will need to submit a bid to get your hands on an Implementation Grant. This funding supports recurrent costs in the period after the feasibility study is complete, up until the opening of your academy. It covers such costs as:
- governance arrangements for the academy
- school development plan costs
- organisation of learning (eg timetabling, lesson plans)
- student and staff policies and procedures
- financial systems, including the preparation of the academy budget
- development of your building project
- your health and safety plan
- salaries for key staff required prior to opening – principal, finance director, and one or two other senior managers.
A couple of months before you are due to open as an academy, the DCSF will meet with your finance director to set out the government’s expectations and requirements and to establish how the financial arrangements are progressing. The information gleaned by the DCSF will be used as part of an overall assessment of readiness for opening. Once you’re up and running you may be able to access Start-up Grants to support temporary costs incurred when your academy opens, for example the purchase of a basic stock of teaching and learning materials, or maybe costs that might be incurred if your academy opens with only some of its planned body of students. Your academy will now enter into a funding agreement with the DCSF. This is, in effect, a contract between the academy and the DCSF setting out the arrangements to be followed as a condition of your receiving funding. Funding Agreements are ‘living’ documents and are updated as the law and policy relating to academies changes. However, the level of prescription that the funding agreement makes will be typically low, allowing your academy a wide freedom to operate within defined boundaries. One of the main issues covered in your Funding Agreement will be your General Annual Grant (GAG). This is your operational funding, which comes directly from the DCSF, not your local authority. You will receive your GAG in monthly instalments and it will be made up of several elements, including:
- School Budget Share – this is the largest proportion of the GAG and is calculated by replicating the funding formula of your local authority.
- The LSC’s funding formula if you have a sixth form.
- Specialist School funding – academies are given additional funding on the same per student basis as maintained schools.
- VAT Grant – academies cannot reclaim VAT on their expenditure and this grant ensures that academies have a broadly equivalent purchasing power.
In addition to your GAG, you may also be entitled to some funding from your local authority in terms of Standards Fund grants and funding for statemented students.
It is important to note that the requirements of company law and the Charity Commission make the financial accounting for an academy much more complex than that of a maintained school. As an example, the DCSF publish a proforma model set of financial statements for academies. That model runs to 38 pages and includes many accounting issues which are unfamiliar to school staff whose experience does not include the financial reporting requirements of a company and a charity. One piece of news about the academy’s financial arrangements that you may welcome, however, is that your financial year will run from 1 September to 31 August. Anyone who has worked previously in a financial capacity in a school will no doubt be relieved that from now on, the academic year and the financial year will be the same! Consistent financial reporting does not apply to academies. While the advantage of this is that academies can determine their own cost centre structure, overall this seems like a disadvantage as it makes benchmarking against other schools impossible. Academies can carry forward underspent funds at the year end, but only up to a maximum of 12% of the annual budget. Any underspend exceeding this amount will be lost. Overspending is absolutely forbidden for academies, so meticulous budget monitoring is absolutely essential. In view of the fact that issues surrounding VAT and academies can be complex, the DCSF recommend that an academy should appoint a VAT liaison officer from within the finance department to manage and monitor all VAT issues. Legislation stipulates a number of financial statements and reports which an academy must produce on an annual basis, including:
- a statement of financial activities
- a detailed income and expenditure account
- a balance sheet
- a cash flow statement
- statement of accounting policies.
Given the complexities involved, accounts should be prepared by a qualified accountant. The DCSF strongly recommends that each academy should directly employ such an accountant rather than relying on external accountancy. You will need a new accounting system, as your current package will not be able to cope with the complexities of company accounting. There are a number of appropriate packages on the market – you should choose one that, as a minimum, can deal with:
Your academy will need to have a management structure that has the experience and expertise to run an organisation that is not only an educational institution, but is also a limited company and a registered charity.
Your governing body will have the overall responsibility for the effectiveness of the financial management arrangements. The governors must ensure that financial planning and management controls are sufficiently robust to safeguard public funds.
To ensure an appropriate level of financial management, every meeting of the governing body must consider:
- a report on the overall financial position of the academy
- a budget monitoring report, including an explanation of any variances against budgeted amounts
- whether adequate financial monitoring of the budget and activities is being undertaken
- progress on any action identified to improve financial arrangements
- significant contracts proposed to be entered into by the academy.
At least once a year, the governors must also:
- review the performance of external providers eg bankers, services provided under SLAs
- approve the academy’s annual accounts
- approve the proposed budget for the following year
- approve the levels of insurance cover for the academy’s assets
- review findings made by the auditors/other financial reviews.
The Funding Agreement requires each academy to identify the headteacher as the ‘accounting officer’. The accounting officer is responsible for all day-to-day financial matters, and is responsible to the governing body for ensuring propriety, as well as efficient and effective use of available resources. In practice, the headteacher will always delegate these responsibilities, for example by appointing a director of finance.
Director of finance
The director of finance (or equivalent) will be responsible for the day-to-day management of financial issues, the management of the academy’s financial position as well as the maintenance of effective systems of internal control and ensuring that the annual accounts are properly and accurately prepared.
This finance director will be a key appointment and should ideally be a fully qualified CCAB accountant with relevant experience. An acceptable alternative could be a member of the Association of Accounting Technicians who has significant relevant experience in either a charity or educational institution.
The ‘responsible officer’
The governors should also nominate a responsible officer (RO) to take specific responsibility for overseeing the academy’s financial arrangements on their behalf. The RO should be an appropriately qualified and experienced individual (but not an academy staff employee) with the necessary financial skills to be able to perform the role competently. The remit of the RO is to provide an independent oversight of the academy’s financial affairs, reporting to the finance committee in an advisory capacity.
The main duties of the RO are to provide the governing body with ongoing independent assurance that:
- the financial responsibilities of the governing body are being properly discharged
- resources are being managed in an efficient, economical and effective manner
- sound systems of internal financial control are being maintained.
A specific programme of checks to be performed will be agreed with the governing body and will include checks on bank reconciliations, orders, payroll documentation, delivery notes, invoices and returns to the DCSF to ensure that the information supplied is consistent with your accounting records. After each checking session the RO will provide the governing body with a written report.
The DCSF will take a very direct interest in the financial management of your academy, and will require frequent and detailed budgetary information, not just at the year end but also throughout the course of the year.
Financial management review visits
In order to gain assurance over the adequacy of financial arrangements of academies, the DCSF conducts an annual programme of financial management reviews (FMRs). These reviews look at whether the systems and control mechanisms that exist in each academy meet the requirements set out by the DCSF. There will be two initial reviews:
- During your first autumn term the DCSF will visit your academy to carry out an initial light-touch review of the financial systems and controls which have been put in place. A report of its findings will follow, along with recommendations for improvement. Your academy will be given the opportunity to comment. A final FMR report is then issued to your chair of governors. Over the year the DCSF will check that the academy has acted upon any recommendations made.
- During your second autumn term, the DCSF will visit to carry out a more detailed FMR, with reporting arrangements on the same basis.
The frequency of subsequent reviews depends on the standard and consistency of application of the controls the academy has established.
Even though the financial arrangements of an academy are more complex and sophisticated than that of a local authority maintained school, this does not seem to have put off over 80 schools that have taken the route to academies. There is no doubt that the potential educational benefits are numerous. In the words of a principal of an established academy: ‘Becoming an academy was the best thing that ever happened to my school. The governors and I can incentivise the staff, we can develop a curriculum that is exactly right for our students. In a nutshell, we can innovate like never before. I would never turn back the clock.’
Useful information The academies website
The academies team can be contacted on 0870 000 2288
The Academies Financial Handbook
Gary Dawson is a school business manager with over 15 years’ experience in school financial management