Education and Skills Funding Agency Releases Academies Financial Handbook 2020

The Education and Skills Funding Agency (“ESFA”) has released the Academies Financial Handbook 2020 (“AFH 2020”) which is effective for all academy trusts from 1 September 2020.

Dated: 2 July 2020 Author: Mark Gurney, Audit Associate Director

This year sees one large change in respect of internal scrutiny and a number of smaller changes in respect of governance and general controls and transparency. The main changes in the AFH 2020 are:

Internal Scrutiny

The largest single change in AFH 2020 is in respect of Internal Scrutiny.

What areas should the work cover?

All academy trusts must have a programme of Internal Scrutiny which should provide independent assurance to the board of Trustees that its financial and non-financial controls and risk management procedures are operating effectively.

The trusts programme of Internal scrutiny must focus on:

evaluating the suitability of, and level of compliance with, financial and non-financial controls. This includes assessing whether procedures are designed effectively and efficiently, and checking whether agreed procedures have been followed;
offering advice and insight to the board on how to address weaknesses in financial and non-financial controls, acting as a catalyst for improvement, but without diluting management’s responsibility for day to day running of the trust; and
ensuring all categories of risk are being adequately identified, reported and managed.

The programme of Internal Scrutiny work must be directed by the trusts audit committee or committee fulfilling the role of the audit committee.

The Audit Committee

Any academy with an annual income in excess of £50 million must have a dedicated audit and risk committee. All other trusts can have a dedicated audit and risk committee or can combine it with another committee such as the finance committee.

The audit and risk committee should meet at least three times per year.

The chair of Trustees should not be the chair of the audit and risk committee.

Employees of the trust should not be members of the audit committee but is it recommended that the accounting officer and chief financial officer should attend meetings to present and provide information and participate in discussions. In the event that the trust has a combined committee, employees who are members of the committee should not participate as members of that committee when audit and risk matters are discussed

The trust must identify on a risk-basis (with reference to its risk register) the areas it will review each year, modifying its checks accordingly. For example, this may involve greater scrutiny where procedures or systems have changed during the year or where items have a higher rating on the trusts risk register.

Delivering Internal Scrutiny

The trusts programme of internal scrutiny must be independent and objective and therefore cannot be performed by the trust’s own accounting officer, chief financial officer or other members of the finance team. All work must be performed by someone suitably qualified and they should be able to draw on their technical expertise as required.

All of the work within the programme should be driven and agreed by the audit and risk committee and should not be influenced or set by management.

The work should be performed on a timely basis and spread appropriately over the course of the academic year. Regular updates should be provided to the audit and risk committee by the person(s) or organisation(s) performing the programme of work. This will include a report which details the findings and any recommendations to enhance the financial and non-financial controls and risk management. An annual summary report should be prepared for each year ended 31 August outlining the areas reviewed, the key findings, the recommendations and conclusions. This will allow the audit and risk committee to consider the appropriate actions and assess year on year progress.

Who can perform the work?

AFH 2020 sees the removal of the option for the internal audit work or internal scrutiny work to be performed by the external auditor. Paragraph 3.20 confirms and reiterates the Financial Reporting Council’s (FRC) revised Ethical Standard that a firm providing the external audit to an entity shall not also provide internal audit services to the same entity. The options that are still available to trusts are:

Employing an in-house internal auditor
A brought-in internal audit service from a firm, other organisation or individual with professional indemnity insurance
The appointment of a non-employed trustee
A peer review by the chief financial officer from another academy trust. The trust should satisfy itself that the trust supplying the reviewer has a good standard of financial management and governance and should minute the basis for its decision. The peer reviewer should be independent of the trust.

The trust may combine the above options and may also use other individuals or organisations where specialist non-financial knowledge is required.

To ensure that those performing the programme of internal scrutiny work are suitably qualified and experienced:

Auditors should be members of a relevant professional body.
Trustees and peer reviewers performing the work should have qualifications in finance, accounting or audit, and appropriate internal audit experience.

[Further information regarding Internal Scrutiny can be found at Part 3 of the AFH 2020.]

Governance

Going Concern

The AFH 2020 reminds Trustees that they are responsible for preparing the financial statements on a going concern basis. To assist Trustees with this, Trusts must:

Ensure that financial plans are prepared and monitored, satisfying itself that the trust remains a going concern and financially sustainable.
Take a longer term view of the trust’s financial plans consistent with the requirement to submit three-year budget forecasts to the ESFA.
As part of its management of the Trust’s funds, explain its policy for holding reserves in its annual report.

[Further information can be found at 1.14, 2.5 and 2.8 of the AFH 2020.]

Trust Members

There is now a requirement that members of the academy trust company must not be employees of the trust or occupy staff establishment roles on an unpaid voluntary basis. This change is effective from 1 March 2021, so Trust’s have a small window to ensure that they meet this new requirement.

The DfE and ESFA’s strong preference is for at least a majority of members to be independent of the board of Trustee’s but at present it is no prohibited for members to also be Trustees.

The responsibility to conduct the Trust’s business sits with the Trustees and therefore members should be “eyes on and hands off” in order to avoid compromising the boards discretion. It is therefore important for members to be kept informed about the trusts business so that they can be assured that the board is exercising effective governance. The must include providing the members with a copy of the trusts audited annual report and financial statements.

[Further information can be found at 1.4 and 1.8 of the AFH 2020.]

Clerk to the Board

The academy trust must appoint a clerk to support the board of Trustees. The clerk should be someone other than a Trustee, principal or chief executive of the trust. A clerk can help the efficient functioning of the board by providing:

Guidance to ensure the board works in compliance with the appropriate legal and regulatory framework, and understands the potential consequences of non-compliance
Advice on procedural matters relating to operation of the board
Administrative and organisational support.

For non-executive Trustees a knowledgeable clerk to the board of Trustees (or a company secretary) can form an essential part of their tool kit.

[Further information can be found at 1.40 of the AFH 2020.]

Register of Interests

AFH 2020 reminds Trusts that they have an obligation to maintain a register of interests that captures all relevant business and pecuniary interests of members, Trustees, local governors and senior employees. The register of interests should cover:

Directorships, partnerships and employments with businesses
Trusteeships and governorships at other educational institutions and charities
For each interest; the name and nature of the business, the nature of the interest and the date the interest began

Trusts must also ensure that they keep their register of interests up to date at all times and not just complete it as an annual exercise.

[Further information can be found at 5.44 to 5.47 of the AFH 2020.]

Executive Team

There is confirmation in the AFH 2020 that both the accounting officer (AO) and the chief financial officer (CFO) should be employees of the academy trust. If either of these positions are filled by someone who is not an employee, the trust would need to seek prior approval from the ESFA.

[Further information can be found at 1.26 and 1.36 of the AFH 2020.]

Trusts must ensure that the CFO and other members of their finance teams are appropriately qualified and or experienced. Trusts must assess whether the CFO, and others holding key financial posts, should have a business or accountancy qualification and hold membership of a relevant professional body, dependent on the risk, scale and complexity of the financial operations. For larger trusts (where they have over 3,000 pupils), the ESFA encourages that trusts consider the range of accountancy qualifications available from professional bodies such as the ICAEW, ACCA, CIMA and CIPFA and takes this in to account when filling CFO vacancies.

[Further information can be found at 1.36 to 1.37 of the AFH 2020.]

General Controls and Transparency

Control Framework

The AFH 2020 confirms the minimum control framework that an academy trust must maintain. These include the following areas:

Ensure delegated financial authorities are complied with
Maintain appropriate segregation of duties
Co-ordinate the planning and budgeting process
Apply discipline in financial management, including managing debtors, creditors, cash flaw and monthly bank reconciliations
Plan and oversee capital projects
Manage and oversee assets, and maintain a fixed asset register
Ensure regularity, propriety and value of money in the organisation’s activities
Reduce the risk of fraud and theft
Deliver independent checking of controls, systems, transactions and risk.

[Further information can be found at 2.7 of the AFH 2020.]

Pupil Projections

As part of ongoing review of the budgeting process, trusts are now required to challenge pupil number estimates on a termly basis as they underpin the revenue projections in the budgets and forecasts.

[Further information can be found at 2.12 of the AFH 2020.]

Integrated Curriculum and Financial Planning

Trusts are encouraged to take an integrated approach to curriculum and financial planning so that they are confident about planning the best curriculum for their pupils and delivering the trust’s educational priorities with the funding that is available to that trust. A toolkit is available on the ESFA’s website to assist trusts in performing this review.

Overdrafts

Trusts are reminded that they must manage their cash position robustly. All trusts must avoid becoming overdrawn on any of its bank accounts so that it ensures that it does not breach the restrictions on borrowing. Trusts may have to report their cash balances to the ESFA where they consider that there are concerns regarding a trust’s financial management.

Publication of Executive Pay

The AFH 2020 sees a new mandatory requirement for trusts to publish on their website in a separate readily accessible form the number of employees whose benefits exceeded £100k, in £10k bandings, as an extract from the disclosure in its statutory financial statements for the previous year ended 31 August. Benefits for this purpose include salary, other taxable benefits, and terminations payments, but do not include any pension contributions that the trust may have made. In addition, trusts are also required to disclose in £5k bandings the same details for any employees who are also trustees.

[Further information can be found at 2.32 of the AFH 2020.]

Whistleblowing

Trustees must ensure that they have agreed a whistleblowing policy and that it is published on the trusts website.

Purchase of Alcohol

The AFH 2020 has clarified and confirmed that the trust’s funds must not be used to purchase alcohol for consumption unless it is being purchased for religious services.

[Further information can be found at 2.35 of the AFH 2020.]

Risk Management

Each trust must ensure that it has an effective way of managing risk and this must include the maintenance of a formal risk register. The overall responsibility and oversight of risk management sits with the board of Trustees drawing on advice and support of the audit and risk committee (or committee fulfilling the same role). In addition to any reviews performed by sub-committees, the board of Trustees must ensure that it reviews the risk register at least on an annual basis. The risk management process must ensure that all risks are reviewed and maintained on the risk register, not just financial risks.

[Further information can be found at 2.38 and 3.6 to 3.8 of the AFH 2020.]

Schools Resource Management Self-Assessment Tool

All trusts must complete the schools resource management self-assessment tool and ensure that their completed checklist is submitted to the ESFA by the specified annual deadline.

Summary

As it can been seen, the ESFA have further strengthened the requirements of the Academies Financial Handbook for periods commencing 1 September 2020. The largest change this year for the majority of academy trusts will relate to how it performs its programme of internal scrutiny. This is to further enhance and improve the level of governance and transparency within the academy sector.

A full copy of the Academies Financial Handbook 2020 can be downloaded from here.

Need assistance?

If you have any questions about the Academies Financial Handbook, please contact a member of your engagement team or email: academies@dains.com