By Sarah Chambers, Education Services Senior Manager, Cooper Parry
The new Academies Financial Handbook
(AFH) took effect from 1 September 2020. There are several changes to be aware of, however, in this blog, Sarah focuses on internal scrutiny.
What is new?
A clarification point:
internal scrutiny should cover financial and non-financial controls.
So, whereas in the past some trusts focused very much on financial controls, for example, testing controls over purchases, payroll and payments, now trusts are expected to have a wide view of all their risks and their programme of internal scrutiny needs to address these.
It is important to have an up-to-date risk register that is monitored and updated on a regular basis. There should be an explicit link between what is in the risk register and the internal assurance work that you have done. The idea is that this work can be used to assess the controls and mitigations you have in place: how appropriate they are, plus how effective they are in practice.
The beauty of this is that although you must have this work done, it is a requirement of the AFH and your Funding Agreement. Your trustees are in the driving seat.
For example, a common risk seen in risk registers relates to funding and sustainability of the trust. This is finance-related but ticking a few invoices back to purchase order will not help. We are looking at bigger, more strategic risks. Mitigations might include your budgeting and forecasting processes to help you plan and quickly respond to changing circumstances. You could direct your internal scrutiny to review the process:
- How robust are the assumptions?
- How integrated is the budgeting process? Does it involve the whole senior leadership team? Is it aligned with the trust’s strategy, or is it pulled together by the Chief Finance Officer (CFO) to meet the ESFA requirements?
- Have you benchmarked the figures? Or thought about integrated financial led planning to challenge your thinking?
- Are variances analysed and understood?
- More importantly, does the trust act on these variances and are there forecasts to support the impact of any actions?
This process will give your trustees some reassurance about whether the mitigations in place are effective and may give some insight into where the process could be improved.
But many of your risks may be related to other non-financial areas. We have seen trusts incorporating health and safety, GDPR, and safeguarding into their internal scrutiny programme of work as they are key areas of risk and a specialist in that field can add a lot of value.
changes in the Ethical Standard for Auditors mean you no longer have the option of using your external auditor to do this work.
If your external auditor did this work for you in the past, you must find a new provider. Make sure anyone you work with meets the requirements of the AFH and has the relevant expertise. As the scope of internal scrutiny widens, you may need several different advisors.
Whatever route you choose, they must be independent and suitably qualified. That means they need to be a member of a relevant professional body. Trustees and peer reviewers should have qualifications in finance, accounting or audit and have appropriate internal assurance experience. Peer reviewers must also be the CFO of another academy trust independent from your own, with good standards of financial management and governance. If you choose this route, the trust must minute the basis for its decision.
Good to remember:
Where can I get more information?
- Approach: trusts must take a risk-based approach focusing on the suitability of and compliance with controls
- Consider recommendations: apart from your risk register, consider recommendations from your external auditors and any ESFA and/or Schools Resource Management Advisor reviews. Changes in systems and controls can be another source of risk.
- Who decides what to do: this should be driven by the Audit and Risk Committee. It may be combined with another committee (often the Finance and Resources Committee) unless your trust income is over £50m, in which case you must have a dedicated committee.
- Timing: the work must be an agreed programme to deliver coverage over the year. So, start early and do not wait until the summer.
- Impact: the work should deliver insight as to the effectiveness of your controls and offer recommendations for how weaknesses could be addressed.
- Requirement of the AFH: if you do not have appropriate arrangements in place you risk a regularity opinion from the external auditors in your statutory accounts and non-compliance with your funding agreement.
These are good starting points:
ASCL Guidance May 2020 Remote Internal Audit
ASCL and Cooper Parry Guidance November 2019 Increasing the internal scrutiny of academy trusts
ESFA good practice guide Internal scrutiny in academy trusts
which includes three useful appendices: a suggested terms of reference for the audit and risk committee of an academy trust; suggested areas of coverage; and a suggested format for the internal scrutiny annual report.
Academies Financial Handbook 2020: Part 3 internal scrutiny
HM Treasury Audit Committee Handbook
Sarah Chambers is Education Services Senior Manager at Cooper Parry
, ASCL’s Premier Partner for auditing, taxation, and IT service.