Part 1: Introduction

Inquiry into management fees paid by South Auckland Middle School and Middle School West Auckland in 2018.

Background

1.1
Charter schools (also known as partnership schools/kura hourua) were an alternative to state schools under part 12A of the Education Act 1989. "Sponsors" such as iwi, not-for-profit organisations, businesses, or existing education providers operated charter schools.

1.2
Charter schools received public funding as well as private donations but had similar freedoms to private schools (such as setting the curriculum, the length of the school year, and teachers' pay).

1.3
As a result of a policy change in November 2017, the Government:

  • repealed the charter school provisions in the Education Act 1989 (from 24 October 2018), meaning that no new charter schools could be established; and
  • began a process of disestablishing current charter schools through negotiations with the sponsors of those schools.

1.4
Sponsors of charter schools that were to be disestablished could apply to open new designated character schools, which could operate under the same name as the charter schools. Designated character schools are described on the Ministry of Education (the Ministry's) website as "state schools that teach the New Zealand Curriculum … but have developed their own set of aims, purposes and objectives to reflect their own particular values".1

1.5
South Auckland Middle School and Middle School West Auckland were two charter schools affected by the policy change. Villa Education Trust was the sponsor for these two schools.

1.6
The Minister of Education established South Auckland Middle School and Middle School West Auckland as new state schools, after applications by Villa Education Trust. The Minister of Education also appointed a Combined Establishment Board of Trustees for South Auckland Middle School and Middle School West Auckland (the Establishment Board)2 to establish the new schools. The Establishment Board had the same trustees as Villa Education Trust.

1.7
In early September 2018, the Establishment Board held its first meeting and agreed to contract Villa Education Trust to perform all aspects of the administration and management services required for the schools to open as designated character schools (in this report we refer to these as the "establishment services"). We discuss the work required to set up the schools later in this report.

1.8
Shortly after that meeting, the Establishment Board paid Villa Education Trust $450,000 for the establishment services.3

1.9
Appendix 1 shows the flow of funding between those involved.

Why we were interested in this matter

1.10
Under section 14 of the Public Audit Act 2001, the Auditor-General is the auditor of all public entities. This includes school boards (including the boards of designated character schools), which are classified as Crown Entities under the Crown Entities Act 2004.4

1.11
Our work helps maintain the public's trust and confidence in the public sector by providing independent assurance that public entities are operating, and accounting for their performance, in keeping with Parliament's intentions.

1.12
South Auckland Middle School and Middle School West Auckland were established as designated character schools in August 2018, but they were not fully operational until 2019. The first financial period that the Establishment Board was in existence for was 29 August to 31 December 2018.

1.13
During the audit of the financial statements for that period, our Appointed Auditor could not obtain sufficient, appropriate audit evidence for the management fees paid to Villa Education Trust. Because of this, they were unable to determine how much of the management fees were valid expenditure.

1.14
Accordingly, in August 2020, our Appointed Auditor issued a qualified audit opinion for the financial statements for the period ended 31 December 2018.5 Our Appointed Auditor also noted the shared membership of the Establishment Board and Villa Education Trust.

1.15
We sought further information from the current Combined Board of Trustees for South Auckland Middle School and Middle School West Auckland after the audit had been completed and the audit opinion issued. However, the information the current Combined Board provided did not satisfactorily answer our questions.

1.16
We also referred the matter to the Ministry, as the agency that had provided the establishment funding to the Establishment Board. We specifically asked the Ministry to:

  • carry out further inquiries relating to the expenditure, to ascertain its validity and appropriateness;
  • assess how the Establishment Board had managed any conflicts of interest;
  • consider whether it should seek to recover any public money that had not been spent appropriately; and
  • report back to the Auditor-General on the outcome of its review.

1.17
The Secretary for Education wrote back to the Auditor-General in February 2021. The Ministry told us that there was:

… no reason to question whether the [Establishment Board] and [Villa Education Trust] have acted in good faith and on a basis they deemed appropriate.

1.18
However, the Ministry concluded that:

… there are insufficient records relating to the management fee paid by [the Establishment Board] to [Villa Education Trust]. [The Ministry has] not been provided records which clearly and accurately document the decision-making process of [the Establishment Board] with respect to agreeing the management fees or how they mitigated conflicts of interest.

1.19
The Ministry told us that it would continue to offer advice and guidance to the current Combined Board around the internal control challenges that the audit work highlighted but it was not able to do anything more about this matter.

1.20
Because of the limited information the schools provided to our auditor and the Ministry, we were not satisfied that public money had been spent appropriately. We were also concerned about the amount of public money involved.

1.21
Accordingly, we decided to carry out an inquiry under section 18 of the Public Audit Act 2001.

Scope of our work

1.22
Our work focused on how the Establishment Board:

  • identified what establishment services Villa Education Trust would carry out;
  • determined the fees that it paid to Villa Education Trust;
  • monitored the delivery of services and gained assurance that it was receiving value for money; and
  • managed potential conflicts of interest arising from the shared membership of the Establishment Board and Villa Education Trust.

1.23
In carrying out our work, we:

  • wrote to the chair of the Establishment Board and the chair of the current Combined Board;
  • considered documentation the current Combined Board provided in response to our questions;
  • interviewed the Establishment Board members involved in the decision-making and processes for engaging Villa Education Trust, some of whom remain on the current Combined Board; and
  • talked with staff at the Ministry and others involved in the process of establishing the designated character state schools.

Structure of this report

1.24
In Part 2, we describe what happened when the charter schools closed and the designated character schools opened. This includes considering the roles and responsibilities for the various activities that had to be completed at each point in the process, as well as the funding streams that the Ministry provided.

1.25
In Part 3, we set out the principles of good procurement practice that we expect public organisations to follow and consider how well they were applied in this instance.

1.26
In Part 4, we focus on the potential conflicts of interest arising from the common membership of the Establishment Board and Villa Education Trust and consider whether those conflicts were managed appropriately.

1.27
In Part 5, we briefly discuss the role of the Ministry in this case and make some suggestions for the Ministry to consider when providing establishment funding in the future.

1: See parents.education.govt.nz for descriptions of different types of primary, intermediate, and secondary schools.

2: Members of the Establishment Board were appointed on 28 August 2018. In June 2020, the Minister of Education approved an alternative constitution for the Combined Board of Trustees of South Auckland Middle School and Middle School West Auckland (New Zealand Gazette (2020), Alternative Constitution for the Combined Board of Trustees of South Auckland Middle School (876) and Middle School West Auckland (877)). The membership of the Board has changed, but it remains a Combined Board. We use the term "current Combined Board" to refer to the current Combined Board of Trustees of South Auckland Middle School and Middle School West Auckland.

3: We refer to a payment of $450,000 because our report focuses on matters arising in the 2018 audit year and management fees of $450,000 were invoiced for that year. In fact, in the accounts for 2018, the Establishment Board recorded that it paid Villa Education Trust $467,391 in management fees in 2018. However, we understand that $17,391 of that amount was pre-paid for services delivered in 2019.

4: Section 7(1)(d) of the Crown Entities Act 2004.

5: The 2018 audit report was delayed partly because of the process that needed to be followed before the auditor could issue a qualified audit opinion for the 2018 management fees.