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Last week the ESFA published the Academies Financial Handbook 2017 (AFH2017) and this will replace the 2016 version with effect from 1 September 2017. A full copy of the Handbook can be found here.

So what has changed from the 2016 edition? As usual, the changes tend to follow the issues that have arisen from ESFA investigations which have taken place in the year or the ESFA attempting to align the AFH with the Governance Handbook. Once again, the ESFA has helpfully summarised the changes (pages 5 and 6) so that they can be easily identified. Below Kreston Reeves have looked at these changes and highlighted the key changes that will have more of an impact upon academy trusts.

Governance

  • The AFH2017 now provides greater clarity about the roles of members and trustees (pages 6-8).

The AFH2017 provides greater emphasis on having signification separation between the two roles. For example it states that employees of the Trust must not be appointed as members unless permitted by their articles of association. The current model articles do not allow members to be employees but older versions may. Trusts with older articles may wish to consider adopting the latest model articles to help improve their governance model as a result, particularly whereby members are indeed employees.

In addition, the Department for Education’s (DfE) preference is for no other employees, other than the senior executive leader, to serve as a trustee. This helps to ensure there are clear lines of accountability through the senior leader. It should be noted this is only a preference, but again, Trusts may wish to adopt this as their governance model.

  • Key Change! – The AFH2017 now states that annual letters to Trusts’ Accounting Officers/CEOs from the ESFA’s accounting officer must be discussed by the board and appropriate action taken (paragraph 1.5.5).

Annually the ESFA sends letters to Trusts’ Accounting Officers/CEOs which cover issues pertinent to their role and the ESFA’s findings. The AFH2017 now states this letter must be shared with members, trustees, chief financial officer and other members of the senior leadership team. It must then be discussed by the board of trustees. Therefore we would recommend that this discussion is clearly documented in the Trust’s board minutes. A full bank of the latest and previous “Dear Accounting Officer” letters can be found here.

  • Improving financial health and efficiency in academy trusts (1.5.11)

Where the ESFA have concerns about a Trust’s financial management, but not enough to issue a Financial Notice to Improve (FNtI), they may prescribe the Trust works with an expert in school financial health and efficiency to support the Trust and identify where improvements can be made. Additionally, they may prescribe this as a condition of an FNtI. This has already been seen as a condition in recent FNtIs published by the ESFA.

  • AFH2017 emphasises the importance of addressing skills gaps on the board at key transition points such as growth periods (1.5.16).
  • AFH2017 highlights using the DfE’s competency framework for governance to determine skills gaps (1.5.16).
  • AFH2017 also refers Trusts to the key features of effective governance in the Governance Handbook when assessing effectiveness (1.5.17)

Although none of these are significant changes, boards should be looking to implement these as part of their annual assessment of their effectiveness and skill-set, as well as documenting these discussions. A recommendation is that trust boards develop their own internal checklist as an annual reminder to ensure they carry out these assessments and look to improve their governance where possible.

  • Edubase must be kept up to date has been emphasised (4.7.4)

Recent ESFA investigation reports have highlighted that Trusts are not keeping their records up to date as to who are members and trustees following either appointments or resignations. This is on both Edubase and Companies House records. Last year we mentioned that Trust’s should consider placing the company secretary or clerk to the board in charge of such record keeping and maintaining so that someone has a specific responsibility to complete this task. Too often than not this is left to the chief financial officer of the Trust and they have enough within their role to occupy themselves with. However, there is no harm in the chief financial officer having access should illness or holidays restrict access at times of change.

  • AFH2017 clarifies that appointment of auditors must be made by the members (4.1.1)

This can often be confused within Trusts and more often that not, the board of trustees believe they are responsible for the appointment of auditors. However, this is only the case where the Companies Act permits trustees to appoint e.g. in the trust’s first period of account. Thereafter the members must appoint.

Financial Control

Rather surprisingly there are few changes as such in this area and the ESFA have just placed greater emphasis on certain items.

  • Key change! The AFH2017 has a new section on executive pay stating that boards must ensure their decisions on levels of pay follow a robust evidence-based process and reflect roles and responsibilities of individuals (2.3.5)

All boards should be ensuring that their decisions on executive pay are well documented and follow a robust process. The decisions should be backed up with supporting evidence and ideally kept in a secure place – perhaps as appendices to any minutes etc.

  • Key change! Repercussive transactions have now been included alongside novel or contentious transactions as requiring ESFA approval (3.3.1)

What are repercussive transactions? They are those which are likely to cause pressure on other trusts to take a similar approach and hence have wider financial implications. At Kreston Reeves we always encourage our clients to step back before entering into any unusual transactions and consider the wider implications. Could this transaction be criticised by the media? Is this transaction outside our normal business activity? Now they will have to consider if by entering into the transaction and another trust hears of this, will it impact upon the wider sector? This always comes down to judgement and perception but our advice is to consult with ESFA before performing the transaction rather than finding out later on you made the wrong decision.

  • The AFH2017 clarifies that the non-statutory/non-contractual element of a severance payment limit of £50,000 is based on the gross amount before any deductions for tax etc. (3.7.6)

It would appear that by introducing this clarification some trusts may have stated that they felt the limit was based upon net pay rather than gross. Hopefully this has clarified for you.

Summary

Overall, not many changes have been made as we continue to see a more settled scene for academy trusts.

Governance continues to be the main theme for changes in the 2017 edition with a real focus on segregation and skills alongside those issues which have arisen from academy trust investigations.

We would recommend that the AFH 2017 is read by all those involved in making the decision on behalf of the trust, in particular Annex B: Schedule of freedoms and delegations and Annex C: The Musts – otherwise, are you demonstrating strong governance and financial management?

Kreston UK’s 2017 Academies Benchmark Report has been published. To request your complimentary copy of the Report, please click here.

The benchmarking report will assist anyone who wants to understand more about how their academy trust is performing.

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