Confidential Internal audit report

Applemore College

05/06

1. Introduction

Background

1.1 Applemore College is a foundation college, having previously been a grant maintained school. At the time of the audit, the Principal was Frank Callaghan, who retired on 31st August 2005. The College is principally a secondary school with 700 pupils, but also has a small 6th form college of approximately 50 pupils.

1.2 The College has technology status and has recently been accredited as a training school. It receives a budget allocation of approximately £2.6m per annum and has accumulated a substantial budget deficit. The deficit brought forward in 2004/05 was £303k, this was reduced to £135k by the end of 2004/05 with the aid of Transitional Grant. A three year draft recovery plan has been produced, but this has been held-over pending the commencement of the new Principal, Matthew Longden, in September 2005.

1.3 The LEA requested a special audit due to concern that corporate governance had broken down at the College. The Chairman of the Governing Body resigned on 17th June 2005 explaining that the working relationships with senior management and the ability to govern effectively had deteriorated to such an extent over the last year, that the Chairman felt unable to carry out the responsibilities and duties required of effective governorship, especially in the light of the difficult financial position. In addition, there were concerns that actions were being taken without the Governing Body's knowledge.

1.4 Audit Services were provided with copies of emails of the concerns raised with the Chairman relating to the actions of the Principal, Mr Frank Callaghan. These are summarised below:  that members of the senior management team (SMT), including the Principal, have a pecuniary interest in two companies, namely, Solent Educational and Digital Media Interactive (DMI) Ltd, and may have contravened Contract Standing Orders and Section 117 of the Local Government Act 1972 requiring officers to declare any pecuniary interest in contracts let, namely: o entering into contracts to rent accommodation and for technical support o the purchase of computer equipment o that the Physical Education AST, had been promoting the sale of a software product called BEST during school time and using training school money, whose franchise was thought to be owned by Solent Educational o that the Principal had instructed the use of College resources, staff and pupils to distribute promotional material on behalf of DMI Ltd and Solent Educational  in addition, the Principal had disregarded the Chairman of Governors, Anne Vaughan's instruction to immediately cease the aforementioned mailshot and the raising of an order of over £10,000 with DMI Ltd following the decision of the Governing Body on 6th June 2005 not to place any further orders other that for consumables, until September 2005 and the commencement of the new Principal.

Previous audit findings 1.5 The previous audit of the college was undertaken in December 2004 and concluded that an effective framework of control existed but highlighted the following significant risk: Audit Services has found that the Principal, a member of staff and a governor are directors of Solent Educational. We were also advised by the Principal that he had carried out consultancy work for Digital Media Interactive Ltd (DMI). Our review of the pecuniary interests register found that appropriate declarations had been made although signatories were still participating in the authorisation of College transactions. During 2004/05, expenditure with DMI was £35,928 and with Solent Educational was £10,117. Our review of Governing Body and Finance Committee minutes and reports found no evidence of this expenditure being approved. However, we did find that with regard to Solent Educational, the Finance Committee had agreed that "if the activity is undertaken, Solent Educational will invoice the college for services, the costs of which will have been identified beforehand, for the Governors Sub Committee, as part of their consideration" (i.e. provide a quotation). In our opinion, there is a risk that the college would have difficulty demonstrating that the Governing Body were aware of and approved the above expenditure. This is particularly important in the event of challenge regarding achievement of best value or the appropriateness of placing orders with companies that have an association with college staff or governors.

1.6 The Principal responded 7 January 2005, that this matter was already in hand and the means for doing it documented, which would continue if and when required.

Governing Body 1.7 Audit Services met with the Acting Chair of Governors, Sylvia Barns, on 24th June 2005. The Acting Chair reiterated the concerns summarised above, plus the following additional concerns given below:  that a large number of pay-points had been awarded to staff (possibly through favouritism) without proper consultation with the Governing Body. In addition, new staff had been appointed when other staff were to be made redundant or were not to be replaced as part of the College recovery plan  that an electrical contractor for the College had been subsequently re-employed by Solent Educational and electrical work charged at a substantially increased rate  that the Governors had approved expenditure of £200 with Solent Educational for services in connection with adult education classes and that the payment was subsequently found to be £2,800 2. Audit objectives and scope 2.1 The aim of this audit is to:  support the Governing Body's decision to control expenditure prior to the new Principal commencing in September 2005 by advising the Governing Body of any instances of non compliance with resolutions on expenditure, Financial Regulations, or, on poor value for money in relation to the College's recovery plan.

 assess for compliance with the previously agreed audit recommendation that the Governing Body should approve all decisions on expenditure relating to companies that members of staff or governors have links with, to ensure transparency, accountability and assurance that value for money has been achieved  assess the extent of any conflicts of interest and whether a pecuniary gain has resulted to staff or governors as a result of transactions entered into by the College and consider whether any contracts have been improperly secured  review the incidence and evidence to support pay changes to staff in the period prior to the introduction of new pay scales in April 2005.

Audit approach 2.2 The approach to the audit was as follows:  ascertain any pecuniary interests of the senior management team (SMT) and Governing Body at Applemore College and confirm whether these have been fully disclosed in the Register of Pecuniary Interests.

 to review income and expenditure relating to Solent Educational and DMI Ltd in 2004/05 and 2005/06 for evidence of compliance with Financial Regulations and the approval of the Governing Body  to examine pay changes and appointments since 1st January 2005 (for 6 months) and ensure these are supported by documentary evidence and have been properly approved by the Principal and the Governing Body's Pay Committee  confirm whether employees listed on the payroll are bona fide  review records and conduct interviews with staff as necessary to establish whether there is any evidence to support the concerns raised paragraphs 1.4 and 1.7 above.

3. Findings Solent Educational Ltd 3.1 Hampshire County Council has made payments to Solent Educational (SE) totalling £28,929.15, of which £25,879.15 relate to Applemore College and the balance to one other school with connections to Solent Educational Ltd. The company search received from ICC Credit Aquila, listed the following members of staff as the shareholders and directors of the company:- Name & Position Director Share-holder Disclosed interest in Register of Pecuniary Interest?

Frank Callaghan (Principal) Yes Yes Yes (dated 22/9/04) Martyn Ashmead (Vice Principal) Yes Yes Yes (dated 27/9/04) Lesley Athersuch (Teacher/Governor) Yes Yes Yes (dated 23/9/04) Christine Stanway (Assistant Headteacher) Yes No Yes (dated 1/10/04) The company was previously named Applemore Educational Ltd, and was incorporated in December 1994. The latest accounts to 31/03/04 show that the net worth of the company fell from £5,000 to £3,000. Full advantage has been taken of small company status and disclosure exemptions in that little information is available on its financial performance or accounts.

3.2 Frank Callaghan explained that the aim of the company was to provide courses for talented and gifted pupils. None have taken place, although the College has been invoiced with costs associated with this totalling £400 for the Autumn Term 2004. SE also assisted in the provision of adult education courses at the College. It was explained by Frank Callaghan and Larry Wynne (Governor at time of audit) that this was to raise income for the school and transfer the associated risks of the venture. However, we ascertained that only one six week course "Working with Wood" took place at a cost of £650 to the College. No income was generated to the school and we found no evidence of a business case in support of the venture, or, a partnership agreement defining liabilities. In addition to this, the Finance Sub-Committee gave approval for £200 to be spent on advertising adult courses, however, the payment to SE was £2,800.

Audit Services' comment:  pecuniary interests of staff and governors were known, although we noted that the declaration of interests is not a regular agenda item at Governing Body meetings. The Governing Body had requested that approval be sought for expenditure to related companies, but this had not been complied with and therefore there was no effective challenge to the cost and arrangements for running adult courses. It is possible that this was a deliberate move to conceal the fact that the decisions taken could result in a potential gain to the Principal and college employees listed above  the lack of any written agreement between the College and SE is unsatisfactory as it has left the intentions of Frank Callaghan, Principal and his co-directors, open to interpretation  given the College's financial position, it was imprudent of the Principal and SMT to embark on this venture without having developed a business case which supported it. A business case should have been put to the Governing Body for approval.

3.3 We found that SE invoices totalling £16,830.06 were headed Solent Repair Centre' and consisted mainly of charges of £25 an hour for electrical type work and £40 an hour for work related to computer maintenance. Although the invoices had been signed as checked and authorised, there was no other documentation at the College, such as timesheets or job sheets, to support the payments. We subsequently found that Jenny Callaghan, the College Personnel Officer and wife of the Principal, had produced and submitted the SE invoices. We requested a sample of the Company's own timesheets/jobsheets to support the payments and from examination, the records clearly show that a mark-up of £5-£10 has been added to the hourly rate paid to the contractor by SE.

3.4 A number of the invoices for electrical repairs referred to work performed by an electrical contractor, at an hourly charge of £25. We found that prior to working for SE, the contractor had been self-employed and had invoiced the College directly at £10-£15 per hour. Frank Callaghan explained that SE had employed the contractor partly out of benevolence and partly to offer his services to other local schools whereby £5 per hour would be payable to the College to generate income. He further explained that no extra work had been forthcoming. We confirmed that £5 per hour had been repaid to Applemore, and thus a commission of £5-£10 per hour from the balance of the fee would have been earned by SE. Audit Services' comment: there was no evidence in support of the viability of generating additional income to the College through the procurement of repairs and maintenance from SE. This suggests that the arrangement was calculated to result in a gain to the above members of staff from the Company's profitability. The extent of any personal gain will have been small in reality, but we consider such actions represent a serious breach of the high standards expected of public sector employees as the public are entitled to expect to have confidence in an officer's integrity and avoid actions that would cause the least suspicion that they could in any way be influenced by improper motives.

3.5 Audit Services has investigated the claim that the Physical Education, AST, has been promoting software called BEST (Behavioural Evaluation Strategy and Taxonomy) during school time and using training school money. The Vice Principal, Martyn Ashmead, informed us that SE does not own the software, but is currently negotiating its purchase, although the source of the funds was not made clear. He also confirmed that the AST had been promoting BEST as part of his role to promote best practice on teacher training.

3.6 We understand that the PE AST is funded to do training work, one day a week (Tuesdays), however, there is evidence to suggest that a disproportionate amount of time has been used to promote the product. In addition, we identified more than 30 occasions when staff cover has been required for the PE AST on dates other than Tuesdays (not sickness). Unfortunately, the records were insufficient to ascertain the reason for the absences, or, what the cost of this has been to the College.

3.7 We would highlight that all absenteeism has to be authorised by Martyn Ashmead (who has a clear conflict of interest) and that presentations have been made to local schools in a clandestine way, without the knowledge of the other AST, Jacky Nash. Further to this, 4,000 A4 flyers advertising BEST have been produced at the expense of the College, on behalf of SE for distribution all over the UK.

Audit Services' comment: the evidence supports the claims that BEST software is being promoted on behalf of SE, comprising of the staff listed above, at the expense of the College. These actions amount to the misuse of the Colleges resources.

Digital Media Interactive (DMI) Ltd 3.8 Hampshire County Council has made payments of £100,732.31 to DMI Ltd. Of this sum, £49,138.08 has been authorised by Applemore School and £51,594.23 by another school with connections to Applemore College. The company search received from ICC Credit Aquila does not list any staff members or governors as a director or shareholder of the company. However, we established a clear business connection between DMI Ltd, the Principal, Frank Callaghan and Larry Wynne (Governor), through their involvement with Moorhouse Black Ltd, now part of Nelson Thorne Ltd. We have been told that Larry Wynne and the two proprietors of DMI Ltd are ex-employees of Moorhouse Black and we have confirmed that Frank Callaghan was previously a director. The Principal has disclosed that he is a consultant for Nelson Thorne Ltd. The companies provide video conferencing facilities, including training and equipment and promote distance learning. Larry Wynne has also declared that he runs a business called "Wynne Video Conferencing".

3.9 The audit has revealed the following:  Contract Standing Orders and the College's Business Manual procedures have not been complied with in respect to the obtaining of quotes for an order to DMI Ltd for media equipment with a value of £17,218.86. Although 3 other quotes had been obtained, DMI Ltd submitted an amended quote after the other 3 had been received and the College then proceeded to place the order with them  the College buildings are acknowledged to be in a poor state of repair, however, devolved capital funds have been used to fund video conferencing equipment and refurbish the Media Suite. No business case on the costs and benefits of video conferencing has been presented to the Governing Body for discussion and approval  a contract commencing 1 June 2005 for £25,800 over three years has been entered into with DMI Ltd for ICT System Support. No quotes were obtained in contravention of Contract Standing Orders. In addition, no approval was sought from the Governing Body as agreed in respect of connected companies  a contract has been entered into dated 12 July 2004 with DMI Ltd for £400 per month for 3 years for the use of a room at DMI's premises on the Hardley Industrial Estate. The room may be used for educational related activities, administration and training with access to video conferencing facilities and training. The room has been used only 9 times in over 6 months and Audit Services has found insufficient business grounds to justify this cost to the College  Audit confirmed that the Principal, Frank Callaghan, agreed with DMI Ltd, that the College would pay postage of £1,400 and provide administrative resource to collate and despatch 4,000 DMI promotional brochures to UK schools. We also confirmed the following: o that the pupil assigned to school admin duties each day had been instructed to collate the material and this continued for several weeks and that on one occasion, several pupils were removed from a classroom to assist o the Vice Principal, Colin McIlroy confirmed that the Chair of Governors, Anne Vaughan had instructed staff to stop despatching the material, but the Principal had told him to tell the admin staff to continue with the exercise o the brochure included an A4 flyer promoting BEST software and headed up Solent Educational Ltd. The Principal, Frank Callaghan told us only the postage had been paid for by the College, however, we established that this was untrue and that the paper and printing for the SE flyer had been provided by the Colleges' reprographic unit at the Principal's request o the promotional brochure includes a glossy A4 page advertising a half day course on video conferencing in conjunction with Applemore College at a price of £90 per person. The covering letter with DMI's brochure says that the course for 21st June was fully booked and there was a new course available on 5th July 2005. However, the Finance Manager confirmed that no enquiries had been received by the administrative staff at the College, or, income received in respect of either date and it was thought that the courses did not take place due to lack of interest o the cover of the DMI brochure includes photographs of the Vice Principal, Martyn Ashmead, his son and several pupils at the school. We established that parent permission had not been sought for this.

Audit Services' comment:  teaching staff have told us that video conferencing is seldom used by the College apart from one psychology course. This raises doubts about the business need for investment in this technology, although it was argued that the expenditure was necessary to qualify for technology status and to attract new students. However, we consider it to be unsatisfactory that the Principal proceeded to invest in video conferencing without developing a formal business case and obtaining the approval of the Governing Body.

 Due to the absence of proper approval and lack of justification to rent accommodation from DMI Ltd, the contract should be set aside immediately  DMI Ltd told us that business was conducted on a "I'll scratch your back if you'll scratch mine basis". This is unacceptable and must cease immediately. Consideration should be given to setting aside the current contract for ICT System Support in favour of defining the Colleges requirements at arms length and re-offering the work through open competition to ensure best value to the College  although there is evidence to suggest that the Principal, Frank Callaghan, Vice Principal Martyn Ashmead and Larry Wynne have an interest in promoting video conferencing, which may extend beyond the business needs of the College, it has not possible to conclude whether they have in fact, gained personally from their actions.

Staffing 3.10 Audit confirmed that all employees listed on the payroll system are bone fide members of staff. The Employee Change Forms were reviewed for the period commencing September 2004 to July 2004 confirm pay points awarded and new starters had been appropriately authorised. The following matters are highlighted:  only pay awards to the SMT had been authorised by the Pay Committee, all other changes had been authorised by the Principal  there was no terms of reference found for the Pay Committee, so we were unable to establish the Principal's level of delegated responsibility in respect of approving pay awards and recruitment and are unable to conclude whether all pay changes had been properly authorised  of the 9 staff changes, there were 6 occasions where these had been counter signed by Jenny Callaghan, Personnel Officer, on behalf of the Governors  a new appointment to SMT had not been signed as approved by the Governing Body  we found that the Pay Committee only meet annually and at a time requested by the Principal. The Committee do not receive paperwork in advance and have had twenty-five cases at one time to consider. There are no minutes of meetings and the Committee does not provide feedback on the cost implication of decisions taken to the Finance Committee  personnel files contained mainly written evidence of the Principal in support of pay awards. Based on the records seen, we are unable to conclude on whether there has been favouritism to particular members of staff.

Audit Services' comment:  Terms of reference for the Pay Committee should be put in place by the Governing Body as soon as possible. These should specify the delegated powers of the sub-committee and the Principal, also the frequency of meetings, forward notice of agenda items and minutes  there should be a link between the Pay and Finance Committees to ensure the cost implications of payroll decisions are fully notified.

Miscellaneous matters arising 3.11 During the course of our review the following matters came to our attention: 3.12 We learned that the College was awarded training school status and is in receipt of £55k grant per annum for training. On enquiry we found that the training budget was only £10k and that the balance had been applied generally by the College - this contravenes DfES rules for the grant and the Principal, Frank Callaghan, should have been fully aware of this through documentation and dealings with DfES. Following a discussion on this with the Principal, he told us that there may be some£70K revenue included in the draft Deficit Recovery Plan which should have been ring-fenced and that he had never been challenged on this practice before, so had assumed it was acceptable.

3.13 The draft Deficit Recovery Plan is not supported by any detailed costings and includes additional income of £10k in 2006/07 from Solent Educational for distance learning and IT. On enquiry, the Principal told us that this was just a guess and probably not achievable. We are also concerned about the feasibility of the staff savings listed.

Audit Services' comments: The composition of the Finance Committee should be reviewed and a revised Recovery Plan produced as part of a report to the Governing Body explaining the measures taken.

3.14 It was brought to our attention that the Principal has directed that staff obtain fuel, for College purposes, from East Boldre Garage, Beaulieu, which is located some twelve miles from the College premises and near to the Principal's private address, rather than from the Tesco garage next to the College. We confirmed that the College has an account with this Garage.

Audit Services' comments: The close proximity of the garage to the Principal's private address suggests that the arrangement with the proprietor is on a personal basis rather than business need and the account should be closed immediately.

Corporate Governance 3.15 During the audit there was clear evidence of a breakdown in relations between the Principal and the previous Chair and Acting Chair of Governors, and also between the Principal and the LEA's Strategic School Improvement Manager.

3.16 From observation, the Principal, Frank Callaghan, had an autocratic management style and could respond in a bullish way to challenge. The Principal had the full support of the Vice Principal, who shared the same business interest and had recently applied for the position of Principal of the College with the support of the Principal. Two members of the SMT and the Chair of the Pay Committee, Larry Wynne also share business interests in common with the Principal. We do not consider this to be conducive to effective corporate governance.

4. Recommendations 4.1 We would recommend that the LEA take the following action.

4.2 Promote closer links between Applemore College Governing Body and Hampshire Governor Services, particularly in relation to:  training and best practice guidance including the powers of the Governing Body, identifying and responding to potential conflicts of interest of both the SMT and Governors, ensuring delegated responsibilities and reporting requirements are sufficiently well defined and advice on the composition of sub-committees  advice on the requirements for the Pay Committee including the terms of reference specifying the delegated powers of the sub-committee and the Principal, frequency of meetings, forward notice of agenda items and minutes  advice on the role of the Clerk (or the offer of an LEA Clerk).

4.3 Advise that the Governing Body develop or adopt the HCC Officers' Code of Conduct requiring conduct of the highest standard and the requirement to avoid actions that would cause the least suspicion that staff could in any way be influenced by improper motives, which would undermine public confidence.

4.4 Recommend that the College cease to have any further dealings with Solent Educational Ltd, including the purchase and promotion of BEST software.

4.5 Seek to have the agreement for the rent of accommodation from DMI Ltd set aside as it was not authorised by the Governing Body. In addition, consideration should be given to setting aside the current contract for ICT System Support in favour of defining the College's requirements at arms length and re-offering the work through open competition to ensure best value to the College.

4.6 The account with East Boldre Garage, Beaulieu should be closed with immediate effect.

4.7 Advocate a closer working relationship with the DfES and the County Council in respect of the use of grants.

4.8 Offer the support and guidance of appropriately qualified finance staff in re-drafting the College's Recovery Plan to produce a viable plan to which all related parties may be committed.

4.9 The completeness of the records for recording and authorising absenteeism should be reviewed to ensure there is a proper audit trail.