The latest audit season may be completed, but academies cannot rest on their laurels. Many aspects of their operations could still come under scrutiny.
Everybody breathes a sigh of relief after 31 January when all audit-related documents have been filed with the Education Funding Agency (EFA), but those documents are not simply filed and forgotten. The audited accounts are incorporated in the Whole of Government Accounts and in February Deloitte begins evaluating the results and looking at items that do not follow set benchmarks. In addition, management letter points are reviewed by the EFA to assess the nature of potential weaknesses in an academy’s systems of controls and the auditor’s recommendations for improvement.
What does this mean for academies? Based on enquiries and discussions with the EFA, it appears that the agency is actively looking at a number of areas.
Firstly, the EFA is showing strong interest in the level of cash resources being held by academies – understood to be in the region of £1.8bn as at 31 August 2013. “This is public money,” notes Ann Mathias, academies specialist at Moore Stephens. “The EFA wants to ensure that academies are spending their money for appropriate purposes and, more importantly, that they are not holding onto cash that could be spent elsewhere in the public sector.” Moore Stephens is therefore advising academy clients on how to explain the reasons for their cash holdings and to make sure the explanation comes through clearly in academy accounts.
The EFA is also interested in audit processes. “The EFA is asking how we are performing our audits, the tests we are conducting on certain relevant items of public interest, and the materiality levels we are adopting,” Ann says. In particular, the EFA is focusing attention on audit work related to special payments, including compensation and non-contractual payments to staff, tendering and procurement procedures and audit tests related to ensuring that academies have identified (and disclosed) all related party transactions.
The EFA is also interested in academies’ compliance with wider regulations and codes, including the HM Treasury’s handbook, Managing Public Money. “The agency is also looking at whether academies have made sure that the tax arrangements concerning senior employees are appropriate,” Ann says. For example, what are the tax arrangements where an education consultant who is related to the academy, such as a trustee, is paid personally for consultancy work. If a trustee is paid for services provided to an academy, is the trustee truly self-employed or should the payment be made through the academy’s payroll?
Another line of enquiry from the EFA concerns whether the auditors have found any areas of irregularity – a reflection of recent investigations conducted in a number of academies. “Another hot issue this year relates to how we have established that an academy’s land and buildings have been recognised correctly in the accounts,” Ann says. “Land and buildings can be substantial balance sheet items, but if they require extensive capital works, their book values can be impaired.” In particular, with 261 schools having been awarded grants under the government’s Priority Schools Building Programme, this may suggest that the book value of existing buildings should be written down rapidly.
In the light of the rapid expansion of multi academy trusts, the EFA is particularly interested in whether such trusts have the controls and procedures in place to manage properly the operations and finances of all the schools in the group.
“Audited accounts aside, I expect other parties to become more interested in academies’ accounts, particularly HMRC,” Ann says. “I anticipate the tax authority looking at VAT issues and potentially conducting PAYE inspections. Academies therefore need to make sure they are fully compliant in such areas.”
Looking ahead, she also foresees increasing demand from academy governors for governance training to help them understand what is required to have the more sceptical mind-set required of them as set out in the Academies Handbook 2013 when considering how effectively academies’ operations are being run. “Governors are likely to become more questioning of academies about the systems and controls they have in place and the steps they are taking to mitigate the risk of fraud,” Ann says.
Focus on the ‘musts’
As a final piece of advice for academies, Ann recommends referring to the Academies Financial Handbook 2013 – specifically the ‘musts’ section in Annex C. “Applying the contents addressed in that section will go a long way to ensuring the academy is adopting a good system of controls,” she says.
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