Civil and criminal liabilities for college governors - the small print of the proposed insolvency regime

As summer term drew to a close, the government issued a consultation on an insolvency regime for colleges. Much of the paper is usefully about clarifying what happens when colleges become insolvent. But it also includes a far-reaching proposal to extend the fraudulent and wrongful trading provisions of the Insolvency Act 1986 to college governors. The introduction of these civil and criminal sanctions may have unhelpful implications.

In setting out the context, the consultation paper notes that, as charity trustees, governors have a duty to act with reasonable care and skill. They must act responsibly, reasonably and honestly; they should put appropriate procedures and safeguards in place. The paper also notes that trustees can be held personally liable to their charity for any financial loss they cause or help to cause by their wrongful action although charity law protects trustees who have acted honestly and reasonably from personal liability.

The paper does not make a strong case for the extension of governor liability. Indeed, it concedes: “Indeed, in the event that [governors] were to breach wrongful and fraudulent trading provisions it is likely that they would, through the same conduct, also already be in breach of their duties as charitable trustees.”

The liabilities put in place by the Insolvency Act 1986 were intended to deter and punish “rogue directors” who enriched themselves through running failed or fraudulent companies. There does not appear to be evidence of rogue or “fly-by-night” governors in the college sector. The financial problems in the sector arise from an extended period of funding reductions and changes.

The unstated rationale of the proposed extension of governor liability is to provide a bigger stick in the Area Review process.

The law firm Eversheds note in a briefing: “In our view, the introduction of the wrongful trading provisions in the context of colleges does heighten the risk for Governors as it makes it explicit that the duty to act in the interests of the creditors is a higher priority than the delivery of the charitable purpose.”

The extension of governor liability may have serious effects on college governance. Existing and potential governors may be discouraged from taking on the already heavy responsibilities of the voluntary position of governor. It’s a hard sell: “you can give up your time, you don’t get paid and you could lose your house!”

It would be a particularly perverse outcome of the proposals if accountants, lawyers and other professionals were increasingly wary of joining college governing bodies.

Phishing: should you be worried of cyber fraud?

1.    What exactly is ‘phishing’?

The text book definition is: “the illegal attempt to acquire sensitive information such as usernames, passwords and account details often for malicious reasons by masquerading as a trustworthy entity in electronic communication”.

2.    What are the worst cases of online fraud/phishing that you’ve heard of?

Victims of phishing may be shy. But we do know that schools can fall victim to online scams.  St Aldhelm's Academy in Poole was contacted by fraudsters pretending to be bank employees and asking about the school's bank account. Staff provided the requested details and the criminals withdrew over £1million. The academy subsequently suffered the ignominy of national press coverage and a financial notice to improve from its funder and regulator, the Education Funding Agency.

3.    What advice would you offer schools wanting to avoid falling victim to online fraud?

Complacency is the greatest threat. Many of us will have had a poorly spelt and badly worded email from a United Nations official or the widow of a recently deposed dictator.  These missives asking for help in transferring funds are often safely redirected straight to our junk filters. However, we must not assume all phishing emails are so blatant. Increasingly, scammers are raising their game and making their emails more professional and hence believable.

4.    What are the most common online scams?

Attempts – both online and offline - to redirect payments from legitimate suppliers to fraudsters appear to be the most common scam in the education sector. There have been increasing reports in recent years of both successful and failed attempts to defraud schools and colleges as well as other not-for-profits.

While technology allows fraudsters to go phishing on an industrial scale, some of the most effective scams have been offline exploiting our innate trust in paper.  There have been several recent cases where BACs electronic payments have been made directly into fraudsters’ bank accounts after correspondence on convincing letterheads asked for the bank details of suppliers to be changed. In 2010 Oldham Sixth Form College transferred £730,000 after receiving such a letter.

Sometimes the fraudsters supplement their paper letters with fake websites as part of the scam.

5.    How can schools tighten up their online security?

While schools should have robust cybersecurity, common sense and caution are essential too. Never give information to your bank which your bank should already know. If in doubt, speak to your bank manager. Always verify verbally any paper or electronic request to change supplier bank details with known contacts. Above all, take care!

Fraud in Schools - what can be done?

In July news emerged of an investigation into an alleged fraud at a London academy after £4million of school funds disappeared. The case was kept under wraps for two years while parents were asked not to speak to reporters although hawk-eyed readers of the Department for Education’s annual accounts for 2012/13 might have noticed oblique references to an “irregularity” at the Haberdashers Aske’s academy trust. The case is believed to be largest school fraud in British education history.

While school managers might expect to notice and stop millions of pounds being siphoned off, schools are at risk from fraud perpetrated by those on the inside and the outside. Complacency - “it could never happen here” – worsens that vulnerability.

A perusal of Google news over a month or two will unearth cases of schools falling victim to managers signing off fake timesheets, finance assistants using cards to pay for holidays and heads appointing friends and family without due process. There are many more con artists outside trying to defraud schools – last year a solicitor was jailed for his part in tricking a sixth form college into paying over £730,000 intended for a genuine contractor into a bogus bank account.

While fraud risks cannot be eliminated, schools can mitigate them. A few simple steps can help:

1.       Get the tone from the top right

School leaders need to lead by example and emphasise probity. That means a fraud policy with zero tolerance of irregularity. There should be a register of interests for governors, senior managers and other staff with significant financial authority or influence. Similarly there should be a policy on gift and hospitality. Everyone should know about these policies – where to find them and what they require. 

2.       Assess risks and mitigate them

The identification, assessment and management of fraud risks should be covered by school risk registers – particularly in the risky area of purchasing.  There is plenty of free guidance available online including fraud risk self-assessments. The Chartered Institute of Public Finance and Accountancy recently published a Schools Fraud Health Check. Simple checks and balances with segregation of duties and independent review of transactions are effective in mitigating risks. This is more challenging for smaller schools, particularly primaries. However, there is normally a second pair of eyes, even if it is a governor, who can ensure that there is never too much reliance upon one member of staff.

3.       Look out for risk indicators

Both the Education Funding Agency and the Audit Commission have published advice on fraud risk indicators. The Commission’s list of behavioural warning signs included: reluctance to take holiday entitlement; poor work practices such as “bending rules”; a lifestyle not equal to income. There may be innocent reasons for strange behaviour but sometimes these can be indications of a staff member with something to hide. 

4.       Use data

While there are software packages to highlight strange patterns in financial data, a spreadsheet is sometimes enough to spot anomalies. A key check to perform is looking at the top dozen or so suppliers over the last year compared with previous years – does it make sense? There may be nothing untoward about using the same suppliers or contractors again and again. But, on the other hand, it may be a sign of an overly cosy or even inappropriate relationship with a supplier. (Aside from fraud risks, this simple review of spend patterns may identify value-for-money opportunities.)

5.       Welcome whistleblowing

Appropriate arrangements for confidential reporting are not only a legal must-have, whistleblowing is vital defence against fraud and other wrong-doing. Staff must know where to find the whistleblowing policy. The policy itself should link into the governance framework, including those elements perceived as most independent e.g. the audit committee, the internal and external auditors.

Are schools doomed to be scammed?

Before the National Fraud Authority ended up on the Coalition’s bonfire of quangos it did a lot of work on raising awareness of fraud. One of its major projects was estimating the total value of fraud in the economy – everything from “blue badge” parking abuse to multi-million VAT fraud. Before the NFA disappeared, it published Annual Fraud Indicators which estimated the loss to the economy of fraud to be £52billion (pdf available).

What has that number got to do with schools? In one month the press reported:

·         Arrests following concerns over the use of£162,000 at an academy following an Education Funding Agency report.

·         Finance staff giving away bank details in response to a phishing email with a subsequent loss of £1m

·         A school bursar being convicted of signing-off fake overtime claims with a loss of £18,000

·         A former head being found to have fallen below the standards expected of school leaders for his involvement in the recruitment of a family member which "breached the expected standards of transparency".

Much detected (and obviously undetected) fraud does not get into the papers. The 2012/13 Department for Education accounts mention a £2m “irregularity” at one academy chain – a Google suggests that the case never got into the press.

The NFA cautioned against its estimates being used for identifying trends. But is fraud getting worse? Quite possibly: while staff will generally be honest and public-spirited, after years of pay freezes and 1% rises, a minority may be demoralised and feel squeezed;  many organisations are struggling to cope with financial pressures so some managers may be tempted to bend rules; greater autonomy for schools creates opportunities but not all are positive.

Are schools doomed to be scammed? In fact, schools can protect themselves through simple steps. But the first step is to recognise that fraud is an issue.

 

 

Later this month I am talking at EdExec Live about how schools can protect themselves. Tickets are still available.

EFA asks academy principals and boards to think about fraud

Today the chief executive of the Education Funding Agency sent a letter to accounting officers (i.e. principals) at all academies in England. It reminded them of the requirements in relation to fraud, connected parties and special payments.

The letter included an annex setting out questions for principals and trustees to consider in order to minimise the risk of fraud or irregularity:

• Authority – Do you have a written scheme of delegation, approved by the trustees, so that individuals are clear about their levels of financial authority?
• Purchasing – Are you confident you are procuring all goods and services in an open, competitive and transparent way?
• Payroll – Do you have robust controls for payroll including checks that payments are for the right amounts and paid to bona fide employees?
• Oversight – Do you ensure that financial reports are produced that fairly reflect the activity at the trust, that they are properly reconciled at least monthly and are shared regularly with the trustees for formal review?
• Cash management – Are your bank accounts reconciled at least monthly?
• Assets – Is all of the trust’s property under proper control and measures in place to prevent loss or misuse?
• Segregation – Do you have appropriate separation of responsibility in your finance team? And are you providing proper management support to your finance staff to help them to operate in a role where they are well-placed to provide you with a “first line of defence” in terms of upholding propriety, regularity and value for money in the use of public funds?
• Records – Do you have robust procedures for recording, documenting, evidencing and monitoring information and especially the reasons for entering into major spending commitments?
• Scrutiny and audit – Do you have properly constituted arrangements for internal review (such as a responsible officer or internal auditor) to give you and trustees a further safeguard that the trust’s financial systems and controls are operating effectively and efficiently? Does the trust debate, and agree how to act upon, recommendations arising both from these internal reviews and from the work of its external auditors?
• Risk – Do you have an effective process for identifying and responding to the major risks that the trust faces?

These are all basic and sensible measures.

Next month I will be talking about fraud risk at the EdExec Live conference. I will be explaining what more academies can do to protect themselves from fraudsters both inside and outside their organisations.

Job losses in colleges – things did not get much worse last year

The college sector has had a bad few weeks. As a consequence of the funding squeeze, especially the painful reductions in adult skills budgets for 2014/15, there have been redundancy programmes announced at FE colleges across the country: Brighton, Kingston, St Helens, Stratford-upon-Avon.

There was some slightly brighter news tucked away in the Skills Funding Agency release of 2012/13 financial accounts for the college sector. Tucked away in the numbers, the number of teaching staff full-time equivalents in colleges fell by only 1% last year compared with 5% in 2010/11 and 6% in 2011/12.

This is not a good news story. There are still over 100 FE colleges in deficit and the number of sixth form colleges with losses doubled. We are only half way through the Coalition’s austerity programme and things won’t be much easier with a different government. The 2013/14 figures might well see an acceleration in job cuts.

EFA tweaks fraud reporting requirements for academies

In the New Year academies may not have noticed a subtle change in the Education Funding Agency’s requirements for fraud reporting.

The Academies Financial Handbook in para 3.9.2 still states:

All instances of fraud or theft committed against the trust, whether by employees or trustees or third parties, above £5,000 must be reported by the trust to the EFA. Any unusual or systematic fraud, regardless of value, must also be reported.

But in January the EFA decided to change the requirements for fraud as they affecting the 16-19 bursary fund and noted on its website:

We have reviewed the advice given to institutions on the threshold for reporting cases of significant fraud to the EFA. The threshold has now been reduced from £5000 to £1200 to reflect the amounts of funds that institutions typically pay to students. Institutions must now report any suspected 16 to 19 bursary frauds of £1200+ to the EFA.

All academies should have fraud policies (as well as whistleblowing policies and fraud response plans). They (and other 16-19 provider) need to make sure their next update of their fraud policies reflects this lower threshold.

The FE Commissioner reflects on college governance

After his first six interventions, the Further Education Commissioner has written to colleges with some reflections. The whole letter is worth a read but below are some extracts with particular relevance to college governance. Governors and clerks should dwell on his thoughts:

• College governors must take greater ownership of their college, driving the strategic direction forward and challenging the Principal and senior leadership team on the quality of teaching and learning and the institution’s financial position. 
• College governors must satisfy themselves that they have a complete picture of how the college is operating by triangulating the information they receive with other sources of information, for example the new Data Dashboard being produced by Ofsted and which is due to be published in the Spring. 
• It is essential to undertake effective succession planning of the governing body; bringing in new and diverse skills and fresh thinking regularly.  I especially see the case for more business people on boards.
• Clerks are vital to the success of colleges.  Clerks ensure that good governance practice is followed and that the Principal/senior leadership team are not exceeding their authority.  Clerks should be independent, supported and have the skills and experiences necessary to fulfil their role.  
• If you’re not already doing so, it is very important that you conduct an annual professional appraisal of your Principal, which examines and reports on their performance to date and sets clear SMART targets for the year to come. 
• College governors should have regular and purposeful training and development. …  They often are working in something of a vacuum with little or no contact with Board members from other colleges and hence are unable to benchmark their performance against their peers. 
• There is some evidence that college governors can be reluctant to take the difficult decisions when there is evidence of poor performance.

Now that I am resuming blogging, I will be writing on some of these governance themes as well as some not mentioned.