Connected body
transactions
Overview
 Introduction
 Requirements
 Disclosure
 Audit approach
 Current issues
Introduction
 ‘Related parties’ are discussed within:
 UK financial reporting standards (FRS 8 Related Party
Disclosures)
 Charities SORP (paragraphs 221-233)
 Related party transactions can deliver value for money
and encourage innovation however they also pose a risk
that transactions are not in the best interests of the trust
 It is important to have transparent disclosure
Introduction
 The Academies Financial Handbook (AFH, or
Handbook) interprets requirements for the academy
sector
 The academy sector must also demonstrate regularity,
propriety and value for money of public funds
 ‘Connected bodies’ are discussed within the AFH
 Note: This presentation will not cover disclosure of an
employee’s remuneration where the employee is also a
trustee – please refer to our other presentations
Requirements of the AFH
 Requirements were clarified within 2013 AFH V2 (S2.6)
and are refined each year
Version
Applicability
2012 AFH
1 Sept 2012 – 31 Aug 2013
2013 AFH
1 Sept 2013 – 6 Nov 2013
2013 AFH V2
7 Nov 2013 – 31 Aug 2014
2014 AFH
1 Sept 2014 – 31 Aug 2015
 Requirements apply to contracts that are agreed or
renewed on or after 7 November 2013
Definition of ‘connected bodies’
 Defined in detail within S2.6.2 – 2.6.3 of the 2013 AFH:
 Member or trustee
 Individual or organisation connected to a member or
trustee (including close family member, business
partner or controlled organisation)
 Individual or organisation that can appoint a member
or trustee
 Individual or organisation recognised by the Secretary
of State as a sponsor
Goods/services to be ‘at cost’
 For these purposes we mean the ‘full cost’ of resources
used in supplying the goods or services, including:
 direct costs (the costs of any materials and labour
used directly in producing the goods or services)
 indirect costs (a proportionate and reasonable
share of fixed and variable overheads)
 Full cost must not include an element of profit
Proper procurement
 Goods/services procured from connected bodies are
subject to normal procurement requirements
 Trust’s financial regulations should outline procurement
processes and handling conflicts of interest
 S2.5.3 of the AFH refers to:
 annex 4.4 of HM Treasury’s Managing Public Money
 contractual thresholds as provided in the Official
Journal of the European Union (OJEU)
 Further guidance available at
https://www.gov.uk/government/collections/buying-forschools
Statement of assurance and open
book agreement
 Statement of assurance
From the connected body to the trust confirming that
their charges do not exceed the cost of goods or
services
 Open book agreement
Requirement for the connected body to demonstrate
clearly, if requested, that their charges do not exceed the
cost of goods or services
Applicability to employment
contracts
 Provisions do not apply to contracts of employment
 Principles of regularity, propriety and value for money
still apply
 Salaries paid should be appropriate to the individual’s
skills and experience and the salary rates paid in the
wider market
Financial disclosure
 Guidance provided in
the Accounts
Direction
 Note 29 (Coketown
Accounts)
 Section 7.6
Why do we need these rules?
 We need these rules to help us mitigate and/or identify
potential risks to public funds
 Related party transactions face significant scrutiny within
the academy sector.
 These rules ensure:
 Public accountability and transparency
 Concerns of our regulators, including NAO and PAC,
are addressed
 Transparency helps manage both real and perceived
conflicts of interest
What if the rules aren’t followed?
 We will follow up – if it is not clear whether related party
transactions were properly entered into
 Breaches – will be taken seriously
 A financial notice to improve – may be issued if the
rules are breached, and future connected party
transactions may need our approval
Audit approach
 Auditors should focus on whether trustees have met their obligations
 Potential tests:
 declarations of business interests have been complete
 trust’s procurement and tendering process followed
 trust has obtained and reviewed statements of assurance
 trust has requested, under the open book arrangement, a clear
demonstration that the charges do not exceed the cost of supply
 governors who provide services are not receiving a profit
 no connected party receives payment under preferential terms
 if employees are providing external consultancy within normal
working hours that the income is received into trust’s accounts
Reporting issues
 The auditor should report issues as follows:
 Regularity report: This conclusion should be
modified where requirements have not been met. To
note, connected body transactions are considered
material by nature
 Management letter: Findings should be reported
where it is unclear whether requirements have been
met
 We will follow up if it is apparent that the auditor has
omitted issues that we subsequently identify
Outcomes from 2012/13 financial
statements (1)
 Around 1,000 trusts disclosed related party transactions
 Around 150 trusts disclosed related party transactions of
>£100k
 Around 20 trusts disclosed related party transactions of
>£500k
Outcomes from 2012/13 financial
statements (2)
 Auditors’ findings:
Outcome
Reason
Volume
Modified regularity
report
Lack of register of interests
1
Inadequate procurement
11
Finding within
management letter
Assorted concerns with
related party transactions
c.200
 Our findings:
 Inadequate disclosure for around 250 trusts
 Further enquiry of 50 trusts with work ongoing to fully
understand these transactions
Outcomes from investigations
 EFA investigations have identified a number of related
party transactions that pose a significant risk to public
funds, including:
 Funds passing to connected organisations with no
apparent benefit to the academy trust
 Normal procurement processes being circumvented,
including lack of open tender
 Breach of Charity Commission rules that prohibit
more than 50% receiving benefit from the trust
 A number of further investigations are underway
 Investigation reports available on gov.uk
Future plans
 The Public Accounts Committee recommends that we
reconsider our policy which permits related party
transactions
 We continue to review outcomes from 2012/13 and
consider how the existing policy framework can be
strengthened further
 Any developments will be reflected within a future
version of the AFH
Summary – What you should do
 Read the relevant version(s) of the Handbook – available
on the gov.uk website, and may also be accessible via
forthcoming EFA ‘Information Exchange’
 Assure yourself that you have met and continue to meet
the requirements
– Register of business interests
– Procurement policy and process
– Review of individual transactions
 Prepare to make the necessary disclosures and
confirmations in your financial statements
Webinar timetable
Interactive webinars
Date
Academies Financial Framework
(academies)
15 July 2014 at 11am
Academies Financial Framework
(auditors)
15 July 2014 at 2pm
 You can register for the webinars at
https://registration.livegroup.co.uk/academyfinance/
 You can submit questions for the panel in advance when you
register, or log back in later and submit your questions
 If you can’t attend on 15 July, you can watch a recording of the
webinar online after the event
Thank you for
watching