Chapter 3.3: Financial Systems and Internal Control - Part 3

3.3.18 Procurement guidance for schools

Basic principles that govern all public spending

There are some basic principles that govern the use of all public funds. They should be considered for any funding arrangement with an external party. This includes procuring goods or services. The international literature on this area includes many different versions of the principles that need to be considered. They cover similar ground. The basic principles are summarised as:

• Accountability – schools should be accountable for their performance and be able to give complete and accurate accounts of the use they have put public funds to
• Openness – schools should be transparent in their administration of funds, both to support accountability and to promote clarity and shared understanding of respective roles and obligations between schools and any external party
• Value for money – schools should use resources effectively, economically and without waste, with due regard for the total costs and benefits of an arrangement and its contribution to the outcomes the entity is trying to achieve
• Lawfulness – schools must act within the law and meet their legal obligations
• Fairness – schools have a general public law obligation to act fairly and reasonably. Schools must be, and must be seen to be, impartial in their decision-making
• Integrity – anyone who is managing public resources must do so with the utmost integrity.

By applying these principles sensibly, schools can demonstrate they are spending public money wisely and properly managing the process for spending it.

Financial delegations and other authorities

School board members and employees must comply with any applicable financial delegations when purchasing goods or services.

A school should cross-reference its procurement policies and procedures to the up-to-date list of financial delegations and ensure that all relevant staff are aware of them.

Once the total cost of purchasing has been approved, financial delegations for payments to suppliers within the approved amount should be set at a level that does not place undue restrictions and administrative burden on the contract manager. In deciding on the levels of financial delegations in a contract, schools may wish to consider:

• the value and complexity of the contract
• the function that the individual is responsible for performing in the project
• the fiscal risk to the entity.

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General approach to procurement

1. Procurement policies and procedures

Publishing an unambiguous procurement policy and following that policy reduces the risk of challenges to the decision-making process and may reduce the cost. It also helps retain credibility with suppliers. Clear processes can help ensure that the procurement policy is consistently followed.

Organisational policies and procedures are more effective when they are up to date and easily available to all staff who need to access them. For these reasons, a school's procurement policies and procedures should include:

• a process for regularly reviewing the policies and procedures and assigning responsibility for updating them
• version control to identify the most recent version
• a process for educating staff, including any agent that the school uses to purchase on its behalf, about the policies and procedures.

2. Keeping records

A school should keep records in accordance with audit and other normal processes of accountability. This includes ensuring that records of all decisions and supporting documentation are available for audit.

3. Liability

When contracting for goods or services, a supplier or purchaser may wish to exclude or limit its liability under the contract. It is not uncommon for suppliers to:

• propose excluding their liability for any losses that are not the direct result of their acts or omissions (for example, for indirect loss, consequential loss, loss of profits);
• limit their liability to an amount that is a specified multiple of the value of the contract.

Schools need to understand that accepting a limitation on liability is different from giving a supplier an indemnity. In accepting a limitation on liability, a school agrees to limit the liability of a supplier to an amount specified in the contract. If the school suffers loss through the supplier's actions or omissions in performing the contract, the school will not seek to recover more than the agreed amount and will bear any loss above that amount.

An indemnity, however, involves a school agreeing to accept the risk of loss or damage that the supplier may suffer and to meet any costs to the supplier for that loss or damage. Schools need to be aware of statutory restrictions on giving indemnities – for example, refer to the Public Finance Act 1989 and the Crown Entities Act 2004.

Legal advice can help address these issues and assist a school with negotiating exclusions and limitations of liability and assessing risks.

4. Confidentiality

Confidentiality is a common characteristic of any competitive procurement process. A school should take particular care when handling commercially sensitive information. Schools should note that confidentiality obligations apply throughout the entire procurement process and also after the contract has terminated or expired.  For more information, see the Office of the Auditor General's Procurement Guide.

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3.3.19 Securities

A security is any interest or right to invest in any capital, assets, earnings, royalties or other property of any person. There are two main types of securities – debt securities and equity securities.

In general terms, a debt security is a right to be paid money that has been lent to someone else. The most common form of a debt security that most people are familiar with is a term deposit. Debt securities can also include debentures, debenture stock, bonds, notes, certificates of deposit and convertible notes.
An equity security is full or part ownership of a private or public company.

What this means is that you can own securities in a registered bank or other credit worthy institution (seek advice on credit worthiness rather than make your own decision, and you can own bonds and stock issued by public bodies, but you cannot own shares in private or public companies (meaning companies listed on a stock exchange.  You definitely cannot invest overseas or in any currency other than New Zealand dollars.

Under s161(1)(a) of the Crown Entities Act and s73 of the Education Act boards may not acquire securities other than:

1. A debt security denominated in NZ dollars that:

• is issued by a registered bank, or other institution, whose credit:
• is rated as ‘A-‘, or ‘A-1’ for short-term securities, or higher by   Standard & Poor's Ratings Group
• is rated as ‘A3’, or ‘Prime-1’ for short-term securities, or higher by Moody's Investors Service Inc, except that
  - where the issue (security) is rated by one of the two agencies listed above it must satisfy the test for that agency, and
  - where the issue is rated by both Standard & Poor's and Moody's, it must satisfy the test for each agency.

2. A public security (this includes any loan or credit agreement, guarantee, indemnity, bond, note, debenture, bill of exchange, Treasury bill, Government stock and any other security representing part of the public debt of New Zealand)

3. A security authorised by regulations or by approval jointly by the Minister of Education and the Minister of Finance under s 160(1)(a) or (b) of the Crown Entities Act and also in s.73(2)(c)(ii) of the Education Act.

Approval of securities

Approval for securities that do not meet the tests listed above requires the joint approval of the Minister of Finance and the Minister of Education.  Approval will only be given if there is no risk to Crown funds; and there is a significant level of benefit (educational or otherwise) for one or more boards or their students.

How to apply for approval to acquire securities

A written application needs to include:

• Reasons for wanting to acquire these securities
• Expected benefits from acquiring the security
• Current financial information for the school
• The value and, where applicable, the term of the security the board wishes to acquire
• Details of any interest a board trustee may have and the extent and/or financial value of that interest
• Any credit-rating or other financial risk information about the issuer of the security
• Any security offered by the issuer
• An assessment of the potential effect on the school in event of default by the issuer
• Information relating to actions taken, or proposed to be taken, by the board to minimise and/or mitigate credit risk exposure if the application is approved.

If approval is granted the following conditions will apply:

• The approval is from the date of the decision and is not retrospective.
• The approval is for this transaction only
• The Crown does not guarantee securities acquired by school boards.

Applications should be forwarded to the Ministry of Education (attn: Senior Implementation Advisor, Schools and Student Support, PO Box 1666, Wellington).

What if a debt security ceases to qualify as authorised?

Should a security cease to qualify as a security authorised by s.73(2) of the Education Act, as detailed above, a board has a period of grace in which it may continue to hold that security.

The period of grace ends on the earlier of:

• Two months after the bank account ceases to qualify
• A date specified by the Minister of Finance and notified to the board.

From the time the board becomes aware that the security no longer satisfies the credit-rating test it must diligently monitor the credit rating of the debt security and take all prudent steps to avoid loss.

What if the school is given the securities?

Section 68 in the Education Act applies to boards that receive gifts of money or property. Under this provision:

• any money or property that is gifted to a school may be accepted or declined by the board.
• any limitation in the Education Act or that applies under the Crown Entities Act 2004 (such as a limitation on the form in which property may be held) does not apply during a period that is ‘reasonable in the circumstances (for schools this is a period of no more than 12 months)’.

This means that the school is required to divest itself of the non-approved securities or apply for approval to keep the securities within a year of receiving them. Requests for approval to retain securities will be assessed on a case-by-case basis. All of the information listed above for an application to acquire securities should be provided with the application to retain securities.

What if the school is given non-approved securities as a conditional gift?

Refer also to Funds Held in Trust in Chapter 4: Financial Reporting.

In some circumstances a board may receive a gift or bequest with the condition that the board must continue to hold the security in its current form. This form of gift or bequest is common in schools where the donor or testator determines that the school should continue to hold the security and fund activities or prizes from any return on that security.

In these circumstances, the acceptance of a conditional gift or bequest creates a trust and the restrictions in section 160 regarding securities do not apply as stated in section 161(2) of the Crown Entities Act. The board may, therefore, continue to hold the gifted or bequeathed security in perpetuity without need to seek approval.

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3.3.20 Segregation of duties

One of the simplest and most effective forms of internal control is to ensure the segregation of any duties relating to purchasing and paying for items or handling money. This makes it harder for one person to steal or defraud the school, unless they have the help of someone else, and employees are not exposed to temptation. 

When considering the segregation of duties schools should try to separate as many as possible of the following functions:

• receipting of cash
• banking
• ordering of goods/services
• authorisation of expenditure
• cheque signing
• accounting records.
• payroll

No one person should have control of ordering goods, approving expenditure and signing cheques. This would allow a dishonest person to purchase and pay for goods for their own use without the purchase ever being checked or detected by someone else. To prevent this situation, the school could require that goods are requested, and the expenditure authorised, by senior staff.  The order is then placed by the school’s administration staff and the cheque signed by a member of the board and the Principal, preferably with neither of the signatories having prepared the cheque.

Effective segregation of duties is much more difficult in smaller schools where there are fewer people available to carry out tasks. However, every attempt should be made to separate as many of the functions listed above as possible, if necessary by the involvement of board members with some tasks.

In addition to the segregation of tasks, another very effective internal control is requiring two signatures on cheques. Two people should also be required to authorise payments made via Internet banking and for authorisation of payments within online payroll system. This arrangement can be formalised with the bank and will help prevent fraudulent payments.

A sample of how financial duties within a school can be segregated is available in the Resources Section.

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3.3.21 Shared funds

There are several instances when schools share resources to achieve a common purpose. Common purposes may include projects to improve teaching and learning, for teacher professional development; to improve efficiencies; or to reduce administration costs. Examples include:

• Enhanced Programme Fund (EPF)
• ICT Professional Development clusters (ICT PD)
• Joint Schools Initiative Funding (JSIF)
• Resource Teachers of Learning and Behaviour (RTLB)
• School transport networks (known as Direct Resourcing or DR)
• Supplementary Learning Support (SLS).

Shared resources may include people, property or funds (money). This information is about how to account for shared funds.

Schools form a cluster or group (referred to as a cluster in the handbook) and share funds for a common purpose as an administrative convenience; the cluster is not a new entity but is a jointly controlled operation.

One school will be the ‘lead school’ (or ‘host school’ or ‘fundholder school’ or ‘initiating school’) for the cluster and act as an agent for all the schools in the cluster. This school is referred to as the lead school in the handbook. The lead school may set up a separate bank account on behalf of the cluster, or account for shared funds using a separate ledger, but can only spend shared funds as agreed with the cluster.

The lead school will receive funds from the Ministry of Education or other funding sources on behalf of the cluster; they may also receive funds from member schools to be used for the cluster’s common purpose.

The lead school should include GST on transactions for the cluster with their own GST returns.

The cluster should have a written agreement about what the shared funds are for, how they are to be used, which school/s own any assets bought with shared funds, and what will happen to any remaining funds and assets when the cluster stops working together.

The use of the funds is subject to the same considerations that apply to the schools that are members of the cluster, eg, reporting, audit, procurement processes, investment of funds and managing any conflicts of interest.

Reporting to the Ministry or other funder of the cluster

An organisation that is funding the cluster (or the part of the Ministry of Education that is monitoring funding provided to the cluster) may have specific requirements about reporting that need to be adhered to by the cluster.

Such reporting requirements will be set out by the funder and are separate to the reporting that schools are required to include in their financial reporting.

Management reporting to other members of the cluster

The lead school should track all income and expenses for the cluster’s purpose separately from their other operations so that they can provide regular, detailed management reports to the cluster and the cluster’s funders.

Each school that is a member of a cluster should show the balance of funds held by the lead/host school on their behalf as an asset in their balance sheets, with reference to a note. The note should include their share of the net income (or expenses) of the cluster for the year to show how the asset balance changed during the year.

See how shared funds are accounted for in Chapter 4.5.