Chapter 2.4: Financial Decision Making
In this section we look at probity, conflicts of interest, and procurement guidance for boards.
2.4.1 Probity
All money received by boards, whatever the source, automatically becomes public funds and boards are accountable for all of their expenditure. Boards of trustees are responsible for prudent financial management of the school and appropriate financial decision-making. They should not spend money on transactions or activities that are extravagant or wasteful, but only approve spending that is appropriate and necessary for the effective operation of the school.
One of the most common reasons given by schools when an inappropriate payment is made is “the payment was from locally raised funds/international student income and not from government grants”. The logic seems to be that schools have to be prudent with grant money, but can do whatever they like with funds raised locally. This argument is not consistent with National Administration Guideline (NAG) 4. School boards and management have a responsibility to ensure that all funds received by the school, no matter their origin, are safeguarded and spent in the best interests of students.
Examples of inappropriate expenditure approved by boards of trustees in the past include the:
- purchase of lifetime Koru Club membership for the Principal and spouse
- hiring of a corporate box to reward staff for their endeavours during the year
- school paying the related costs for a spouse or companion on an overseas trip.
Boards should consider the following before approving proposed expenditure.
- Does the expenditure further the aims of the school?
- Could the board justify this expenditure to a taxpayer, parent or other interested party?
- Would publicity over this spending adversely affect the school?
- Would there be perceived to be any personal gain to this expenditure?
- Whether the expenditure represents the best value for money?
- Is it in the budget?
- Does this expenditure occur frequently?
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2.4.2 Conflicts of interest
What constitutes a conflict of interest?
A conflict of interest arises where a trustee has an interest that conflicts (or might conflict, or might be perceived to conflict) with the interests of the board itself. That interest may relate to money or any other potential benefit. The key question to ask when considering whether an interest might create a conflict is:
"Does the interest have the potential to create an incentive for the trustee to act in a way which may not be in the best interests of the school?"
Types of conflicts of interest
A conflict of interest may take a number of forms. It may be financial or non-financial. It may be direct or indirect. It may be professional or family-related. A conflict of interest may arise from:
- family relationships
- existing professional or personal relationships
- directorships or other employment
- interests in business enterprises or professional practices
- share ownership
- beneficial interests in trusts
- professional associations or relationships with other organisations, including appointing bodies
- personal associations with other groups or organisations
- decisions taken that may have a benefit to the decision-maker.
Trustees will need to assess the risk of a conflict of interest on a case-by-case basis, but there are some situations that can be highlighted, including:
- involvement in meetings where decisions relating to close relatives (eg, students or staff) are being discussed
- attendance at meetings by principals or staff representatives where any matter relating to their own employment is being discussed
- attendance at meetings by the student representative where any matter relating to that student is being discussed
- where a trustee has a child at school where any matter specifically relating to their child is being considered at a meeting
- where an appointed trustee is faced with an issue and the interests of the school diverge from the outside interests of the trustee’s appointing body (eg, the appointing body profits from managing home-stay accommodation for international students).
If the answer is ‘yes’, a conflict of interest exists. The existence of the incentive or a perception of bias is sufficient to create a conflict. Whether or not the individual concerned would actually act on the incentive or allow it to influence their decision-making, is irrelevant. Refer to Ministry of Education circulars for further detail.
Managing conflicts of interest
As part of the general obligation to act fairly, schools must take care that their decision-making processes cannot be challenged on the basis of actual or potential bias and/or conflicts of interest. These legal obligations will often be mirrored in the ethical standards that govern public sector conduct.
Complying with any relevant statutory requirements will not necessarily be enough to ensure that decision-making processes meet the more general public law requirement of fairness. Schools must also take steps to ensure that no other aspect of the process could be influenced by a conflict of interest arising outside of those processes. For example, the statutory requirements tend to be confined to the declaration and management of conflicts of interest by members of the board of trustees. But conflict problems might also arise as a result of the interests or associations of officials, staff members or other participants in the procurement process.
In June 2007, the Auditor-General produced two guides on conflict of interest issues to assist:
School staff should be aware of the potential for conflicts of interest for every staff member and adviser who is directly or indirectly involved in any aspect of the process. This includes governance, management, operational staff and the approving authority. All staff involved in the purchasing process should be required to declare any personal interest that may affect, or could be perceived to affect, their impartiality. The school will then need to decide what steps are necessary to manage the conflict, having regard to any relevant statutory requirements. The school should maintain a register of declarations of conflicts of interest that records how they will be managed.
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2.4.3 Procurement guidance for boards
Procurement covers all the business processes associated with purchasing, spanning the whole cycle from the identification of needs through to the end of a service contract or the end of the useful life, and subsequent disposal, of an asset.
Schools often work in a complex environment in terms of both the type and range of goods or services being procured. To be effective and efficient in purchasing goods or services, schools need to be clear about the overall objective and select a method that will give them best value for money. To do this effectively, schools must have a detailed understanding of what they are purchasing, the value and risk and how important it is to achieving their overall goals and business strategy.
The Auditor-General has developed a set of procurement guidelines that set out the considerations that need to be made and best practice processes for ensuring that the processes at schools meet public accountability expectations. These guidelines can be found here.
These guidelines also expand on the different methods that schools can use to approach the market (ranging from simple credit card purchases with local suppliers through to complex multi-stage offers) and the factors they need to take into account when deciding on the appropriate method.
These guidelines are a statement of good practice. They are not a set of rules. Rather, they outline the principles, considerations and processes that should help schools to meet ethical standards and act with integrity when purchasing goods or services.
Schools are expected to develop their own procurement policies and procedures that reflect value and risk and that are appropriate to their overall business objectives and operations. A school may use these guidelines as a benchmark and guide on what its own procurement policies and procedures should contain.