The head of finance at Two Mile Ash School in Milton Keynes, Kathryn Nethersole, was recently jailed for 26 months for fraudulently obtaining £120,000 from the bank account of her employer.
The Court was told how Ms Nethersole had targeted this top-performing school because its academy status would give her free rein over its finances.
Ms Nethersole began to divert money out of the school's bank accounts two months after taking up her post in 2011. The fraud was only detected in the summer of 2014 when it was noticed that she had paid a £5,000 cheque into her own account, but listed an alternative payee on school records. It was discovered that she had deliberately lied to the headteacher and governors when presenting budgets.
Ms Nethersole's actions left the school financially vulnerable, although it is reported that she has repaid the £120,000.
Several audits were carried out during the time that she was in charge of the school finances but they failed to reveal any anomalies, which the judge suggested demonstrated her ability to manipulate the system.
Other members of staff noticed that her luxurious lifestyle was inconsistent with her level of income; that she was retaining too much involvement in day-to-day matters and would not delegate tasks in order to minimise the chances of the theft being discovered.
The Court was advised that her crimes had a devastating impact on the school's reputation and finances. For example, it was unable to bid for approximately £150,000 of government funding from the Education Funding Agency.
The money she diverted was intended for the education of the school's children but unfortunately the losses meant that major school projects had to be shelved or postponed.
Implications for academies
The case raises issues in relation to the liability of governors of academy schools. It demonstrates the risk of academies being targeted by fraudsters as they manage their own million pound plus budgets. Could the governors find themselves liable for failing to detect the fraudulent activity sooner, and what can they do to ensure they are live to potential fraudulent activity?
Nature of academy schools
Academy schools are charitable companies limited by guarantee and known as “Academy Trusts". This type of company has no share capital and is required to direct all funds received to achieving its aim – in this case to advance education. Academies manage their own budgets and have considerable financial freedom. That greater financial freedom increases the responsibility of governors to ensure that all funds are properly used and to prevent fraud.
Governors are registered as directors of the Academy Trust company at Companies House, and for charity law purposes are the Academy Trust's trustees. The Academy Trust's Memorandum and Articles of Association will set out its objects and composition and also define the responsibilities of its governors.
As company directors, the liability of academy governors is limited as they cannot be personally held responsible for debts of the Academy Trust that have been properly incurred. However, because they are directors the governors may, conceivably, be personally liable (to third parties and/or the academy trust itself) if they breach their duties.
They are, however, responsible for the day-to-day management of the company, including managing the budget and finances, and have the same duties as any other directors under the Companies Act 2006. These include a duty to exercise independent judgement and a duty to exercise reasonable skill, care and diligence. Governors could also potentially be personally liable if there was an equivalent breach of their duties under charity law. Breach of these duties can result in a director being disqualified from acting as a director and could lead to the director having personal financial liability.
Governors are one of the largest groups of charity volunteers in the country. Volunteers would be deterred from the role if there was too much personal risk. For this reason it is considered that the circumstances in which they would be personally liable are very limited.
The Department for Education (DfE) advises that governors should not be personally liable if they are carrying out their duty in good faith and has suggested that insurance for governors is therefore “unlikely to represent good value for money because trustees acting honestly, reasonably and within their powers will not incur personal liability", though many schools still put insurance in place to provide comfort to their governors.
Therefore, so long as governors are acting reasonably they could not be expected to discover financial misdeeds such as those in the Nethersole case, which even the company's auditors could not spot.
Minimising the risks
Governors should undergo training and assist new governors on joining, to help them understand their responsibility and what to look out for. The DfE's Governors Handbook and the Charity Commission's The Essential Trustee is recommended reading.
Governors should be provided with their governing document, the Academy Trust's Articles of Association. Governors should familiarise themselves with this and the terms of the Funding Agreement.
It is recommended that governing bodies have a spread of abilities to draw on, including the ability to understand and interpret the full detail of the available financial and performance data. The governors should review the expertise they have and the gaps that they need to fill.
Put in place clear routes for raising an issue, should there be a concern, and if in doubt seek independent advice. Consider obtaining insurance to cover the governors for negligent acts, errors and omissions.
Detecting fraud
In terms of financial training for governors, a good starting point is the Academies Financial Handbook which is available online and sets out the basic financial management, control and reporting requirements that apply to Academy Trusts.
It describes the freedoms that academies can exercise in their day-to-day business. Compliance with the handbook is a condition of an Academy Trust Funding Agreement.
The Education Funding Agency also provides a useful list of generic indicators of potential fraud for learning institutions entitled Fraud Indicators: A generic checklist for learning institutions. This document looks at:
- Potential personal motives for fraud and warning signs – such as staff being eager to work unusual hours, reluctance to take leave and insistence on doing the job alone.
- Potential organisational motives for fraud – such as financial problems or one personality within the organisation being highly dominant.
- Possible weaknesses of internal controls – such as inadequate systems or management displaying a lack of concern for laws and regulations.
- Transactional indicators – such as related party transactions with inadequate or incomplete documentation or travel accounts with inadequate documentation.
- Possible methods of committing and concealing fraud – such as staff being annoyed when questions are asked; providing excessive information in some areas and little or none in others and frequent forgetfulness.
- Indicators in record-keeping and banking documents – such as variances between budgeted amounts and actual costs and duplicate payments.
- In relation to record-keeping
it is advised to look out for missing documents or documents that are signed in pencil or have unusual signatures.
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Helen Otty is an associate in the commercial litigation team at business law firm DWF.