Part C1: Regulatory approach – Responding to for profit and non-compliant activity

Suspected for profit activity is assessed by NESA on the facts of each matter to determine the most appropriate regulatory response or intervention.

In making regulatory decisions the Minister and the Advisory Committee must adhere to the provisions in the Education Act and the Education Regulation.

NESA undertakes activities to monitor the compliance of schools to determine future areas of focus for engagement and education activities and the annual audit of financial affairs program, and to assist the Minister and Advisory Committee in identifying instances of for profit activity.

NESA draws on a range of information sources to monitor schools’ compliance including:

• through NESA’s annual audit of financial affairs program
• complaints received by the Minister or NESA, including from members of the public, that allege or suggest possible for profit activity
• referrals from stakeholders (e.g. representative bodies) that raise concerns or suspicions of for profit activity
• information shared through cooperation with other regulators such as the Australian Charities and Not for Profit Commission (ACNC) and the Australian Government Department of Education, and other relevant authorities
• media or social media reports that allege or indicate potential for profit activity.

Regulatory responses and actions

The Education Act and Education Regulation provides a suite of regulatory tools that may be used in response to suspected for profit activity. The regulatory responses available are graduated to enable responses that are appropriate to the nature and severity of activity. For example, minor instances of for profit activity (such as those which are the result of a one-off oversight or error) may result in a direction to cease specified activity or a non-compliance declaration. A for profit declaration may be considered in more serious matters.

C1.1 Education and engagement

NESA and the Advisory Committee focus effort on activities that support schools’ awareness and understanding of how to comply with the not for profit requirements of the Education Act. These efforts are designed to promote proactive compliance and reduce regulatory intervention.
This includes:

• providing written feedback to enquiries on specific not for profit compliance matters and questions
• issuing the Not for Profit News (newsletter) targeted at promoting a greater understanding of the not for profit requirements supported by guiding materials on specific topics
• informative and procedural documents describing the different compliance processes
  ipresentations on the not for profit requirements at forums, workshops and other sector events
• supporting new schools to understand the requirements.

C1.2 Annual audit of financial affairs program

Each year, NESA selects proprietors/schools for audit based on regularly reviewed risk factors. Audits are undertaken by appropriately skilled and qualified external consultants on behalf of NESA.

These include (but are not limited to):

• newly established schools
• schools with significant transactions (e.g. capital projects)
• school systems with shared services risks
• trends in financial data, regulatory information, or past compliance matters.

Audits may target specific aspects of not for profit compliance or focus on particular themes aligned with compliance goals. Upcoming audit themes are communicated through NESA’s education and engagement activities.

Where an audit is finalised, a copy of the final audit report is provided to the school by the auditors and also to NESA. NESA will review the audit report to identify if there are any issues requiring further action or any procedural matters where feedback or guidance could be provided to the school. NESA will advise the school of the outcome of that process. NESA will generally pay for the costs of these audits. However, in some exceptional circumstances proprietors/schools can be directed to pay for the reasonable costs of an audit. This may occur, for example, in circumstances where a proprietor/school has failed to cooperate or provide information which has meant additional resourcing has been required to complete the audit.

C1.3 Preliminary enquiries

Where information is received about a specific allegation of suspected for profit activity, NESA may undertake an initial assessment to determine an appropriate regulatory response.

At this stage NESA may:

• determine that no further action is required
• take no action but provide written advice to the school that the specific activities undertaken by the school put them at higher risk of for profit activity and continue to monitor the school
• make direct enquiries with relevant parties to clarify the matter
• issue a direction to the school (see below for more details on directions); and/or
• seek the Advisory Committee’s advice as part of initiating an investigation into the proprietor/school.

C1.4 Written directions

Written directions may be given to schools and proprietors as specified below. Directions will also outline the manner, time that a proprietor/school must comply with the direction by (including verifying the information through statutory declaration). Schools can be declared non-compliant for failing to comply with a direction.

Direction to undergo an audit of financial affairs*

After seeking the advice of the Advisory Committee, NESA may direct a school or proprietor to undergo an audit of financial affairs. In exceptional circumstances, schools can be directed to pay for the reasonable costs of the audit.

Direction to provide specified information*

NESA may direct a school or proprietor to provide specified information relating to the affairs of the school or proprietor.

Direction to cease any specified conduct*

After seeking the advice of the Advisory Committee, NESA may direct a school or proprietor to cease any specified conduct that is in breach of the obligation not to operate for profit.

Direction to take specified action to remedy a breach of the obligation not to operate for profit*

After seeking the advice of the Advisory Committee, NESA may direct a school to take specified action to remedy conduct in breach of the obligation not to operate for profit. The direction will generally be applied if the conduct is considered minor and is reasonably capable of being rectified.

*Note: These are powers of the Minister under the Education Act that have been delegated to NESA.

C1.5 Investigations*

After consulting with the Advisory Committee, NESA may carry out an investigation into a school or the proprietor of a school if it is suspected that a school may be operating for profit or may be a non-compliant school (NESA may decide not to carry out an investigation and the school will be notified in writing if this occurs). In exceptional circumstances, the Minister may defer all or part of the school’s funding during an investigation.

Following an investigation, NESA will prepare a report summarising the facts, for profit or compliance breaches, and its advice to the Advisory Committee to support it in making a recommendation to the Minister (see below). Proprietors/schools will be provided with the investigation report before it is submitted to the Advisory Committee to provide submissions and other written materials in response to the investigation report. Any responses of the proprietor/school will be considered by the Advisory Committee.

Once an investigation has been finalised NESA will issue written confirmation to a school on the closure of an investigation.

*Note: This is a power of the Minister under the Education Act that has been delegated to NESA.

C1.6 Declaration that a school is non-compliant

The Minister may declare that a school is a non-compliant school. The Minister may make a non-compliance declaration only if the Advisory Committee recommends that the declaration be made (recommendations of the Advisory Committee can also include that a school’s funding is reduced, suspended or made subject to conditions).

Non-compliance declarations can be made when:

• the for profit activity is minor and therefore stopping payments of financial assistance is not justified, or
• more appropriate action can be taken such as suspending, reducing or imposing conditions on financial assistance instead of stopping payments of financial assistance (which is required where a school is declared to be currently operating as a for profit school).

A school may also be declared non-compliant due to a failure to assist in an investigation or to comply with a directive, for example (but not limited to) a direction to cease specified conduct, to rectify minor for profit activity or a direction to provide specified information.

C1.7 Financial assistance may be suspended, reduced or made subject to conditions

The Minister may suspend, reduce or impose conditions on the funding provided to or for the benefit of a school that is a non-compliant school.

Conditions on financial assistance are generally designed to provide a school and its proprietor with a clear set of actions to address any for profit activities and, as appropriate, support compliance into the future. Schools are required to comply with the conditions and complete actions identified, or face further regulatory action by the Minister.

NESA closely monitors school’s compliance with conditions until these have been met and/or are removed.

C1.8 Declaration that a school operates for profit

The Minister may declare that a school operates for profit or has operated for profit during a specified previous period, or both. The Minister may make a for profit declaration only if the Advisory Committee recommends that the declaration be made.

Funding must not be provided to a school that operates for profit (the Minister’s obligation not to provide financial assistance to a school that operates for profit applies, whether a for profit declaration has been made).

C1.9 Recovery of amounts from schools

The Minister may recover the amount of any funding provided by the Minister to or for the benefit of a school if the funding was provided when the school operated for profit or was a non-compliant school.

Schools will be formally notified if recovery is being considered through a recovery show cause notification which includes the Minister’s preliminary decision on the amount to be recovered and the timing and method of recovery, based on the information available to the Minister at that time.

Schools will have an opportunity to provide written submissions and other materials to the Minister as an important step in procedural fairness before a final decision is made.