Part 11: Unlawful expenditure by schools - 2009 follow-up

Central government: Results of the 2007/08 audits.

Schools are governed by boards of trustees, made up of members of the local community (usually parents of children attending the school). There are about 2450 schools and 18,000 trustees.

While the board of trustees of each school is a Crown entity in its own right and, as such, has legal obligations, the Ministry of Education (the Ministry) also performs an important role with schools. The Ministry seeks to support good governance and management, develop clear expectations of quality, and provide core infrastructure in the schools sector.1

The Auditor-General is the statutory auditor of all state schools, and appoints auditors to carry out the audits on his behalf. An important aspect of our audit work is assessing whether public entities, including schools, have complied with the legislation that affects their operations.

The scope of our previous audit work

Since July 2004, we have reported the results of three pieces of audit work on unlawful expenditure in schools. These reports assessed:

  • whether payments to school principals for additional duties were lawful and in accordance with any relevant Ministry requirements (our 2004 report);2
  • the extent to which schools complied with the law on a number of financial matters (our 2005 report);3 and
  • the progress the Ministry had made on reducing the incidence of unlawful expenditure since our earlier two reports (our 2007 report).4

Our findings

Our 2004 report found examples of unlawful payments to principals made both through the Ministry’s central payroll system and locally by schools. We were concerned that boards of trustees were not always complying with their legal obligations and that some principals had received additional remuneration without Ministry approval.

Our 2005 report noted that most schools complied with the law, but that the Ministry needed to take further action to reduce the incidence of non-compliance, particularly by integrated schools where public funds had sometimes been used to provide financial support to private entities.

Our 2007 report followed up on the Ministry’s progress in implementing the recommendations made in our 2004 and 2005 reports. It found that, while the Ministry had taken action on some of the matters raised in our two previous reports, it needed to consider further action to ensure public accountability on the part of school boards for unlawful payments. We made five further recommendations for improvement.

The scope of this Part

In this Part, we follow up on the Ministry’s response to the five recommendations made in our 2007 report.

The response to our 2007 report

Review of approvals for additional remuneration

Background information

In July 2004, we reported on the payments made to principals through the Ministry’s central payroll system and directly by boards. Our audit work found cases in 11% of secondary schools where additional remuneration to principals had been paid without Ministry approval. Between 2004 and 2007, when we followed up on the Ministry’s response to our 2004 recommendations, the Ministry had done significant work to tighten its systems and guidance for approving additional remuneration. We were comfortable in 2007 that most schools now understood the legal requirements on these matters.

Therefore, in 2007, we did not examine the Ministry’s systems and processes in the same detail as in the special audit exercise that formed the basis for our 2004 report. However, we noted that 14 of the 90 applications for additional remuneration approved by the Ministry in 2006 did not appear to have been paid through the central payroll system.

In most of these cases, there was no obvious reason why a board should seek and obtain approval for additional remuneration and then decide not to make the payments through the central payroll system. Therefore, we recommended that, as a matter of routine, the Ministry review approvals that have been given to ensure that boards were not making payments locally.

In 2009, we asked the Ministry what action it had taken in response to this recommendation.

The Ministry’s response

The Ministry will introduce a process that does not significantly increase compliance costs for schools to follow up on the absence of a payment through the central payroll system.

The process will involve contacting schools, on a six-monthly basis, to follow up payments for which approval has been sought but that were not paid through the payroll. A report would be generated recording school responses and actions taken to address any unlawful expenditure. This process will be introduced by 1 June 2009.

Recovery of unlawful payments to principals

Background information

The terms and conditions of employment for school principals are contained in a collective or individual employment agreement. The Ministry approves all such agreements, which set the amount of remuneration to be paid for normal duties. A principal might also have other responsibilities for which extra remuneration can be paid. Legislation requires that the Ministry approves all such additional remuneration before it is paid, and that it is paid through the Ministry’s central payroll system rather than locally by a board.

In July 2004, our analysis of a sample of payments found a significant number of additional payments had been made without Ministry approval. The Ministry and we were concerned about the extent to which unapproved additional remuneration had been paid outside the central payroll system.

We recommended in our 2004 report that the Ministry consider whether recovering the unlawful payments was possible or appropriate. The Ministry commissioned a legal opinion on this matter in 2005, which concluded that the Ministry had no power to require a board to apply for approval of a payment of additional remuneration or to cease making an unlawful payment. The Ministry is also unable to direct a board to take action to recover an unlawful payment. The Minister is unlikely to be able to use their statutory powers of intervention in schools to require a board to take recovery action against an employee, or to replace a board with a Commissioner if a board was not prepared to seek recovery of an unlawful payment.

When we reviewed this situation in 2007, we considered that these arrangements were unsatisfactory. As it stands, a school board can make an unlawful payment to its principal, continue to make such an unlawful payment, and not be required either by legislation or the Ministry to consider recovery. The only recourse that appears to be available to the Ministry in these circumstances is to take action against trustees personally if it can be shown that they did not act in good faith.

Our 2007 report also gave an account of unlawful remuneration to the principal of a school with a roll of about 400 students. In this case, the principal had received unlawful remuneration amounting to $269,000. The total cost to the board, including tax and possibly penalties and interest on unpaid tax, could have been nearly $400,000.

Since these matters were brought to the attention of the board of the school, it acknowledged that it had not complied with the relevant legislation and confirmed that it now fully understood its obligations. It gave the Ministry an assurance that there would be no further breaches.

The Ministry recommended to the board that it take steps to recover the unlawful remuneration. However, the board decided not to take any action, on the grounds that there is no reasonable prospect of recovery.

We considered that this case added further weight to the need for the Ministry to strengthen the arrangements for reducing the incidence of unlawful payments, and to enable recovery action where they occur.

Our 2007 report noted that the Ministry was considering how best to address enforcement and recovery issues. It also noted that this may require a change in legislation to strengthen the Ministry’s ability to promote compliance with the current legislation. We recommended that the Ministry conclude its consideration of how best to address issues of enforcement and recovery in relation to unlawful payments made to principals.

We note that, before the Education Act 1989 was amended in 2001, one of the provisions gave the Minister the power to dissolve a board and replace it with a Commissioner if satisfied that the board had taken or intended to take an unlawful action, or had failed or refused or intended to fail or refuse to take an action required by law.

In 2009, we asked the Ministry how it had responded to the above recommendation.

The Ministry’s response

There is a proposed amendment to the Education Act due to be considered later this year. The Ministry will provide advice to the Minister to consider changing this Act to provide powers to the Minister to dissolve a Board and replace it with a Commissioner if satisfied that it had taken or intended to take an unlawful action, or had failed or refused or intended to fail or refuse to take an action required by the law.

Payment of remuneration by proprietors of integrated schools

Background information

It first came to our attention in 2004 that the principals of some integrated schools were receiving remuneration from the proprietors of the schools (the owners of the school buildings) in addition to the normal salary payable from public funds. We considered that such arrangements might breach section 7(4) of the Private Schools Conditional Integration Act 1975, which prohibits the payment of additional remuneration by proprietors for normal duties. Therefore, we recommended that the Ministry consider the extent of the remuneration received by the principals of some integrated schools from the school proprietors, whether such payments are lawful, and, if not, how they may be stopped.

The Ministry considered that it has limited ability to identify payments made by proprietors directly to a principal. Any such payments would not be included in a school’s annual reporting on its principal’s remuneration (which is restricted to remuneration paid by the school) and would be outside the scope of the audit of a school (which does not include reviewing payments made by a proprietor or income received by a principal from third parties).

Therefore, we recommended in 2007 that the Ministry regularly request a statement of all money paid directly to all school staff , the amounts involved, and the reasons for the payments from each proprietor of an integrated school.

The Ministry’s response

The Ministry has limited ability to seek this information from integrated schools.

The Ministry is considering using Integration Agreements with these schools to regularly request a statement of all money paid to all school staff , the amounts involved, and the reasons for the payments from each proprietor of an integrated school. The Ministry will report back to us on this proposed response by 30 June 2009.

Guidance for boards of trustees on legislative matters

Background information

Our 2005 report recommended that the Ministry consider providing simple advice to integrated schools, and their proprietors, on specific aspects of the legislation relating to the financial relationship between schools and proprietors. During 2005 and 2006, the Ministry issued a number of additional pieces of guidance on legislation. We considered that this was comprehensive and up to date, but remained concerned that it may not be accessible enough for many of the 18,000 trustees who may have little or no experience in managing a public entity when they first join a board.

Therefore, in 2007, we recommended that the Ministry issue simple and accessible guidance, directed at inexperienced trustees, on the major financial constraints on the operation of schools – for integrated schools as well.

In 2009, we asked the Ministry what action had been taken in response to this recommendation.

The Ministry’s response

The Ministry considers that guidance has been made available to trustees through a number of sources including:

  • the Financial Information for Schools Handbook;
  • Working in Partnership Information for New School Trustees 2007-2010;
  • targeted advice to schools and boards of trustees, such as circulars outlining approval requirements following settlements of collective agreements; and
  • support to schools from regional financial advisors.

In addition, the Ministry is actively working to reconfigure its website to provide school boards of trustees with a “one-stop shop” style of webpage that allows individual members to access needed material and guidance. The Ministry anticipates that the website will be completed and the guidance available by 30 June 2009.

Regularising possible unlawful expenditure by integrated schools

Background information

We reported in 2005 that about 200 state integrated schools had a breach of law recorded as a note to their financial statements. These breaches were due to historical cases where the boards of state integrated schools used public funds for capital expenditure that was the responsibility of their proprietors.

The integrated schools appeared to have provided a total of about $30 million of public funds for the construction or improvement of buildings on proprietors’ land. Early in 2004, the Ministry agreed to carry out an exercise to make this expenditure lawful, but this action had still not been taken when we reported in 2007. Therefore, in 2007, we recommended that the Ministry attach a higher priority to regularising the $30 million of possibly unlawful expenditure incurred by integrated schools on buildings owned by proprietors.

The Ministry’s response

In 2007 and 2008, the Ministry, after consultation with us and the Association of Proprietors of Integrated Schools, took steps to resolve this matter. About $13.1 million of the total of more than $30 million of historical expenditure was written off . The remaining $17.8 million was regularised in a way that protected the interests of all parties.

Where large expenditure had been incurred, proprietors were asked to recognise the board’s interest in that property. This interest is known as an “equitable leasehold interest”, which is an unsecured interest in capital assets. The value of the equitable lease will be written off over the economic life of each asset.

Concluding comments

The actions that the Ministry has taken and proposes to take should resolve the issues mentioned in our previous reports. We will continue to monitor progress on the issues to see whether the actions have been effective.

1: Ministry of Education Statement of Intent 2004-2009, (2004).

2 Central Government: Results of the 2002-03 Audits, pages 45-65.

3 Central Government: Results of the 2003-04 Audits, pages 83-92.

4 Central government: Results of the 2005/06 audits, “Part 7: Unlawful expenditure by schools”.

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