The report highighted a lack of transparency over academy trusts’ spending over the last year and a failure to meet expenditure limits as the department exceeded two of the budgetary limits set by parliament, according to the latest report into the finances of the DfE by the National Audit Office (NAO).

Going forward, the continuing lack of transparency means that the whole approach to the reporting procedure for academy trusts will be overhauled. 

The NAO comptroller and auditor general, Amyas Morse, has provided an adverse opinion on the truth and fairness of the DfE’s group financial statements 2015-16.

He has also qualified his regularity opinion because the department has exceeded two of its expenditure limits authorised by parliament.

The overspending related to two particular issues. The first was a breach of the capital departmental expenditure limit (currently £5,001m) by £115.9m as a result of the budgetary impact of Aggregator Vehicle plc, the intermediary company used by DfE for raising finance for the priority school building programme (PSBR) and financing of school capital projects. This over-expenditure was apparently not foreseen and was outside the budget for financial year 2015-16. The Treasury has agreed to cover this additional cost in future DfE budgets.

The second overspend was £175.1m due to higher than anticipated impairment charges on academy land and buildings. As a result, the DfE is reviewing its approach to valuation, although this will be less of an issue under the new Sector Annual Report and Accounts.

The report for 2015-16 reviews the department’s latest group financial statement which includes consolidated financial statements for 2,910 academy trusts responsible for 5,552 academies.

‘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,’ says Morse.

Challenges over amalgamating two different reporting periods were highlighted.

The DfE has a different reporting period from that of the academy trusts and must produce its financial statements by a year end of 31 March whereas the trusts have a year end of 31 August (to align with the end of the school year).

The NAO said that ‘this presents the Department with the significant challenge of preparing financial statements which provide a true and fair view of the financial activity for the period in question and the financial position at the end of that period’.

As a result the year end accounts do not reflect the full financial picture, says the NAO report.

Responding to ongoing criticisms over the reporting of academy trust finances, the accounting regime is changing with the introduction of a new reporting system based on preparation of separate aggregated accounts for academies from year end 31 August 2016. The first Sector Annual Report and Accounts will be published in June 2017.

The Department already produced a dry-run of the Sector Annual Report and Accounts for the Education Select Committee in October 2016.  

This approach removes the academy trusts’ financial results from the DfE’s group financial statements, which will instead reflect only grants paid to academies.

The problem will not be fully eliminated as the DfE will not change the reporting period for the trusts, but faces problems with consolidating the accounts as it does not require a second set of statements to cover the period to the end of March on the ground that the extra resource needed would be better spent on providing education.

Instead it has sought to prepare the group financial statements by using the academy trusts’ financial statements to the end of August and then making adjustments using centrally collated information where necessary. It has made the assumption that financial data for the year to the end of August, with the adjustments, would not be materially different for the equivalent to the end of the following March.

The NAO considers that the approach adopted by the DfE does not give a true and fair view of its financial performance or position. Furthermore, the approach does not provide the required accountability to parliament.

Despite the reporting issues highlighted in the report, the NAO has not identified material inaccuracies in the financial statements of the individual bodies making up the group.

The NAO Comptroller and Auditor General’s Report on the Department for Education’s financial statements 2015-16 report is available here