There is a "material and pervasive" level of error and uncertainty in the Department for Education's financial statements because of the inclusion of academy schools in its accounts, according to the National Audit Office public spending watchdog.
Under the academies programme, more than 4,500 academy schools are now funded directly through central government, rather than through a local authority, and must produce full, audited accounts for scrutiny by the DfE. Since 2012, the DfE's financial statements have included those of academy trusts, as well as those of the department and its agencies.
But academy trusts record their accounts based on the school year, rather than the fiscal year used by the DfE, and the NAO points out that this has presented the department with the "significant challenge" of preparing financial statements that provide "a true and fair view" of its financial activity.
DfE perm sec Chris Wormald apologises to MPs for "disappointing" delay in department's accounts
Cabinet Office's Jonathan Slater is new Department for Education perm sec
The DfE was expected to present its 2014-15 accounts for parliamentary scrutiny by the end of January, but it had to ask the spending watchdog for a three-month extension, a delay for which the department's outgoing permanent secretary Chris Wormald last month apologised to MPs.
While the National Audit Office makes clear that it has not found any "material inaccuracies in the financial statements of the individual bodies making up the group", it has given an adverse opinion "on the truth and fairness" of the DfE group's financial statements, and warns that the department has "exceeded three of its expenditure limits authorised by parliament".
The DfE has decided not to ask academy trusts to change their reporting periods or provide statements that line up with its own practices, arguing that this would take resources away from frontline education.
But the NAO says the department's current approach, which instead seeks to adjust the DfE's own financial statements, "does not give a true and fair view of its financial performance or position" and "does not provide the required accountability to parliament".
According to the NAO, the department is now working with the Treasury and parliament to remove academy trust financial results from its own financial statements and prepare a separate "sector report" at the end of the school year, a move the watchdog says could help address the problem.
The NAO says: "The Sector Report option, if implemented effectively, will provide a solution to a number of the issues faced by the department. It will not, however, address all of the causes of error and uncertainty and limitations which the comptroller & auditor general has identified such as the recognition of land and buildings."
"The Department will have to work hard in the coming months, if it is to present parliament with a better picture of academy trusts’ spending" – NAO boss Amyas Morse
Publishing the NAO's report, comptroller & auditor general Amyas Morse said: “Providing parliament with a clear view of academy trusts’ spending is a vital part of the Department for Education’s work – yet it is failing to do this.
"As a result, I have today provided an adverse opinion on the truth and fairness of its financial statements. The Department will have to work hard in the coming months, if it is to present parliament with a better picture of academy trusts’ spending through the planned new Sector Account in 2017.”
A DfE spokesman said academies were subject to a "rigorous system of accountability and oversight" which was "tougher and more transparent than maintained schools".
He added: "This is reflected in the NAO's finding that there are no material inaccuracies in individual academies' statements.
"However, the consolidation of thousands of those accounts into the format required by Parliament is one of the largest and most complex procedures of its kind.
"All of these accounts are published individually by trusts ensuring they can be held to account by the department and the public."
"We left the problem of how we do this with us rather than shipping it on to schools" – DfE perm sec Chris Wormald
Wormald, DfE's outgoing perm sec, last month apologised to MPs for the "disappointing" delay in presenting the accounts for parliamentary scrutiny, saying the "sheer scale" of the changes required by the academies programme had posed a particular challenge.
And he sought to justify why the department had not asked academies to bring their reporting periods in line with those of the department.
"At one level, there would be a very simple solution, which would be to make all academies account for themselves on a financial year rather than an academic year," he said. "Very bluntly we took the view that if there was pain to be taken, we ought to take that at national level rather than individual school level. So we left the problem of how we do this with us rather than shipping it on to schools."
Peter Lauener, chief executive of the Education Funding Agency – which is responsible for funding state schools – meanwhile said it was "very unusual in accounting terms to have a gap of seven months between one year and the other".
The NAO's verdict came on the day that the department confirmed that senior Cabinet Office official Jonathan Slater is set to be become the DfE's new permanent secretary from next month.
Update: This article was updated on 21/4 to include a full response from the DfE