Academies Financial Handbook 2020 – Review of key changes
The Academies Financial Handbook 2020 (AFH 2020) has recently been published and it is available here. The purpose of these notes is to provide a summary of the key changes. AFH 2020 applies with effect from 1 September 2020.
- AFH para 1.14 stresses that trustees must take ownership of the trust’s financial sustainability and its ability to operate as a going concern. The finance committee should provide support on this, ensuring that effective financial plans are prepared and scrutinised. The ESFA has produced a good practice guide on going concern which can be found here. This provides Trustees with the definition of going concern together with helpful points to enable them to challenge the trust’s financial sustainability more effectively.
- AFH para 1.4 previously stated that members must not also be employees of the academy trust and it now also confirms that they cannot occupy staff establishment roles on an unpaid voluntary basis. This requirement is effective from 1 March 2021.
- One of the key roles of members is the appointment and removal of trustees, so they have an interest in board effectiveness. In this context, Para 1.8 stresses the importance of keeping members informed about trust business so that they can be assured that the board is exercising effective governance. As an absolute minimum, they must be provided with the Annual Financial Statements each year for discussion at the AGM. However, the implication of the new wording in AFH 2020 is that a mechanism for periodic dialogue with members is needed. Members should pay particular interest to governance reviews undertaken or procured by the Board. (For more guidance on the role of members, see section 5 of the Governance Handbook).
- AFH para 5.46 states that trusts’ Register of Interests must be kept up to date on a regular basis. To facilitate this, we recommend that an update on business interest becomes a standing item on your board meeting agenda.
- AFH 2019 stated that both the Accounting Officer and Chief Financial Officer (CFO) should be on the trust’s payroll. However, AFH 2020 has added the requirement that trusts must obtain prior approval from the ESFA if it is proposing, in exceptional circumstances, to appoint an individual to one of these key roles who will not be an employee (paras 1.26 and 1.36). This will be particularly relevant where there is a sudden departure from either role and trusts are looking to appoint a replacement on an interim basis.
- The expectation for the CFO role has been raised for larger trusts (for example over 3,000 pupils). ESFA encourages these trusts to consider the range of accountancy qualifications available from professional bodies and to take this into account when filling CFO vacancies. The AFH also states that CFOs should undertake continuing professional development and relevant ongoing training. It also notes that relevant apprenticeships are available for CFOs and other finance staff seeking qualifications for their level of responsibility and states that trusts should consider using the apprenticeship levy for professional development of finance staff.
General controls and transparency
AFH 2020 strengthens the expected controls and procedures that trusts should have in place:
- Trusts must maintain a fixed asset register (para 2.7)
- The Board should challenge pupil number estimates (as these underpin revenue projections) and review them termly (para 2.12)
- Boards are encouraged to adopt Integrated Curriculum Financial Planning (ICFP) to ensure curriculum planning provides the best education with the resources available (para 2.13)
- Trusts must avoid becoming overdrawn on any of their bank accounts (para 2.24)
- The trust must publish on its website in a separate readily accessible form, the number of employees whose benefits (gross pay, taxable benefits and termination payments) exceed £100k, in £10k bandings. This will be an extract from the disclosure in its financial statements for the previous year ended 31 August (para 2.32). Hence, the details in the 2019 financial statements should be published from 1 September 2020, until your 2020 financial statements are finalised.
- Continued stance that alcohol must not be purchased, although there is now an exception where it is for religious services (para 2.35)
- Whistleblowing procedures must be published on the trust website (para 2.44)
- In para 2.38, more clarity is provided on the roles of the Board and its Audit & Risk committee in relation to risk management.
- In paras 3.6 to 3.8, references to audit committee have been changed to audit & risk committee, highlighting the role of this committee in the risk management process.
- For trusts with an annual income of up to £50m, these responsibilities can still be combined with another committee, such as finance but in that situation, we recommend that the agendas and minutes should separately identify the audit & risk aspects of the proceedings.
- Para 3.20 makes it clear that from 1 September 2020, accountancy firms which undertake both external and internal audit work can no longer offer both services to a trust due to the Financial Reporting Council’s latest Ethical Standard.
- Para 3.1 reiterates that the programme of internal scrutiny must extend to non-financial risks and related controls. It notes that this may require trusts to supplement financial internal scrutiny work with the use of other individuals or organisations with specialist non-financial knowledge.
- The findings, recommendations and conclusions of both the financial and non-financial risk reviews should then be included in the internal scrutiny summary document to be submitted to ESFA by 31 December each year (para 3.23).
- For further details, see ESFA’s internal scrutiny good practice guide which is available here.
Role of the audit & risk committee in the external audit process
Para 4.17 introduces specific guidance about the steps which the audit & risk committee must take:
- review the external auditor’s plan each year;
- review the annual report and accounts;
- review the auditor’s findings and actions taken by the trust’s management in response to those findings;
- assess the effectiveness and resources of the external auditor to provide a basis for decisions by the trust’s members about the auditor’s reappointment or dismissal or retendering.
- produce an annual report of the committee’s conclusions to advise the board of trustees and members, including recommendations on the reappointment or dismissal or retendering of the external auditor, and their remuneration.
The updated AFH again introduces some significant refinements with a view to further strengthening governance and financial management within academy trusts and Baroness Berridge, the new schools minister, highlights their importance in her introduction to AFH 2020.
We recommend that the Handbook is read by all trustees and members of the trust’s senior leadership team, particularly Part 8 – the list of Musts. An annual review of compliance with these is clearly necessary – if you would like help with that, please do get in touch
If you would like a discussion about any of the points mentioned above, please contact one of your usual contacts in the BHP Academies team.