Auditor-General John Ryan has criticised the board of two former charter schools for paying $450,000 in government funding to the schools' owners just before they joined the state school system.

South Auckland Middle School.
South Auckland Middle School Photo: Supplied/Google Maps

In a report published today, Ryan said the establishment board of South Auckland Middle School and Middle School West Auckland effectively paid itself when it paid the Villa Education Trust for management and administration work in 2018.

The establishment board was in charge of the schools' transition from charter schools to designated character state schools and had the same members as the board the Villa Education Trust, which owned the schools and would become their proprietor once they joined the state system.

The report said the schools' auditors flagged the payment because they were unable obtain sufficient evidence to determine how much of it was valid.

"The auditor also noted the shared membership of the Establishment Board and Villa Education Trust and that the amounts charged were significantly higher than normally seen in other schools under similar circumstances," the report said.

The Auditor-General said his office's investigation found the board had valid reasons for engaging the trust but there was no formal agreement or scope of work before the money was invoiced and approved and no evidence that the board had determined what it was paying for or if the fee was appropriate.

"The circumstances of this payment create a perception of a lack of integrity. Acting with integrity, and being seen to act with integrity, are fundamental to maintaining the public's trust and confidence in public organisations and in the public sector as a whole," the report said.

"The Establishment Board cannot assure the public that the decision to engage Villa Education Trust and the amount of the management fees were not influenced by the personal interests of trustees of the Establishment Board."

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Photo: Controller and Auditor General

The report said the Education Ministry paid the Villa Education Trust $291,000 to "terminate" the charter schools and the schools' establishment board was paid $1.74 million to prepare them for opening as designated character schools.

It said the ministry paid the first tranche of money to the board in September. The next day the trust sent the board a $250,000 invoice for Middle School West Auckland and a $200,000 invoice for South Auckland Middle School for "management fee" and "set up", which the board paid the same day.

"In our view, $200,000 and $250,000 represent significant spending for a public organisation such as this and it is unacceptable that there is no record showing unequivocally: who approved the spending as being valid; who authorised the invoices for payment; and whether they had the appropriate authority to do so," the report said.

The report said the establishment board did not think there was a conflict of interest because the Minister of Education knew the board and the trust had the same trustees.

It said also said the Education Ministry knew the board had engaged the trust to provide establishment services.

The report said the Audito-General did not accept that either fact absolved the board of its responsibility to identify and manage conflicts of interest.

Charter schools were publicly-funded private schools set up from 2014. By 2017 there were 11 schools operating, but they were abolished by the incoming Labour-led government and given the option of closing or becoming designated character schools or state integrated schools.

Villa Education Trust response

In a statement Villa Education Trust chief executive Karen Poole said establishing the schools as designated character schools "was an extremely complex process, affecting all aspects of the schools from property to operational leases to staffing to curriculum to governance policies".

"The establishment involved a significant amount of work (estimated at 4000+ hours) in a short space of time in order to regularise the schools into the new policy environment as quickly as possible. As our Ministry of Education-appointed governance facilitator noted in the report this was a new and challenging environment for all involved," she said.

"We are confident that we handled this prudently, appropriately and with strong governance protocols in place. We worked closely alongside the Ministry of Education teams and followed their guidance at all times.

"While ultimately we accept the OAG's findings that there could have been better documentation around the relationship and scope of work between the two entities, we remain comfortable that the school establishment was within the establishment budget we were given by the Crown for the changeover and was spent diligently on the school establishment process."