Key Changes to the Academies Financial Handbook (AFH) 2020
Earlier today (23 June) the ESFA published the Academies Financial Handbook 2020 (AFH2020). This will replace the 2019 version with effect from 1 September 2020. A full copy of the handbook can be found here.
As expected much of the changes to the latest Handbook centre around internal scrutiny requirements. It is clear the ESFA are looking to improve this area of reporting and ensure that Academy Trusts’ internal scrutiny is more akin to that seen in further education entities.
Going forward Trustees will need to review their internal scrutiny arrangements and not look for the “basic” option which ensures they are compliant. Internal scrutiny is now seen as a critical piece of work that helps support finance committees and the trust board in maintaining oversight.
So, what has changed from the 2019 edition? The changes range from small clarifications to current areas that the ESFA are keen on improving often make headlines. Once again, the ESFA has helpfully summarised the changes (page 9) 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.
The AFH2020 (paragraph 1.14) further stresses the importance of Trustees taking ownership with regards to assessing the academy trust’s ability to continue as a going concern. The ESFA have produced a handy good practice guide on going concern which can be found here. This provides Trustees with the definition of going concern along with helpful points to enable Trustees to challenge the financial status of the trust more effectively.
Key change! AFH2020 (para 1.4) continues to state that members must not also be employees of the academy trust. This now also includes being an employee on an unpaid voluntary basis. This requirement is effective from 1 March 2021.
As well as members continuing to receive the annual accounts, they must also be kept informed regarding trust business (para 1.8). We would recommend that there is regular dialogue between the trust board and members throughout the year to ensure this can be achieved.
Last year it was a “should” and now it is a “must” that trusts appoint a clerk to support the board (para 1.40).
Key change! Para 5.46 states that trusts’ Register of Interests must be kept up to date on a regular basis. Often trusts tend to update the register on an annual basis but it is clear this is no longer sufficient and that going forward the register should be updated regularly. We would recommend that this takes place in conjunction with your meetings as part of a standing agenda item on business interests.
Key change! The AFH2020 continues to state that both the Accounting Officer and Chief Financial Officer (CFO) should be employees however, as of 1 September 2020, where either position is taken by a person who is not an employee, the trust must obtain ESFA approval prior to the appointment (paras 1.26 and 1.36).
This will be particularly relevant where there is a sudden departure from either role and trusts look to appoint a replacement on an interim basis.
Key change! In addition, the expectations for the CFO role have been raised (para 1.37). For larger trusts (those with more than 3,000 pupils) Trustees are now expected to consider whether the CFO should hold a business or accountancy qualification for a relevant professional body. This should be taken into account when considering a vacancy in the CFO role. Examples of professional bodies include the ICAEW, ACCA, CIMA and CIPFA.
Furthermore, those CFOs who have such qualifications are expected to maintain their professional development and take relevant ongoing training (para 1.38). Although this would be expected as the above professional bodies require this from their members.
General controls and transparency
The AFH2020 increases the expected controls and transparency that trusts should have in place going forward. These include:
- Trusts must maintain a fixed asset register (para 2.7)
- Trustees should challenge pupil number estimates and review these 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 2.15)
- Trusts must avoid using bank overdrafts – this includes individual accounts, not just an overall position (para 2.24)
- Key change! Those employees whose benefits (gross pay, taxable benefits and termination payments) are more than £100k must be published on the trust’s website as an extract from your financial statements for the preceding accounting period. Therefore, from 1 September 2020, the details of those meeting this threshold in the 2019 financial statements should be published until your 2020 financial statements are finalised. The information should be reported in £10k bandings (para 2.32).
- Continued stance that alcohol must not be purchased, however 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)
Furthermore, the trust’s risk register must be reviewed by the board of trustees (at least annually) who retain overall responsibility for the register (para 2.38) and should only receive support from the audit committee, not delegate responsibility to.
Finally, it is made clear that the audit committee must also report to the board on the controls around non-financial risks as well financial ones (para 3.8).
Again, the AFH2020 makes it clear that the internal scrutiny process should also have consideration for the non-financial risks an academy trust monitors (para 3.1).
Key change! The AFH2020 makes it clear that from 1 September 2020 accountancy firms who undertake both the external and internal audit can no longer offer both services to a trust in-line with the Financial Reporting Council’s latest Ethical Standard. Therefore, trusts will need to identify a new provider for their internal audit service where this is the case (para 3.20).
Furthermore, trusts should also look other individuals/organisations to cover the non-financial risks they will look to seek assurance on. Therefore, the AFH2020 makes it clear that internal audit is not solely to be undertaken by persons with financial expertise, but more of a collective effort (para 3.18).
The reports and findings of both the financial and non-financial risk reviews should then be included in the internal scrutiny summary document submitted to the ESFA by 31 December annually (para 3.23).
The last key change once again surrounds the remit of the audit committee (para 4.17). The committee must 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. This includes consideration such as:
- the auditor’s sector expertise
- their understanding of the trust and its activities
- whether the audit process allows issues to be raised on a timely basis at the appropriate level
- the quality of auditor comments and recommendations in relation to key areas
- the personal authority, knowledge and integrity of the audit partners and their staff to interact effectively with, and robustly challenge, the trust’s managers
- the auditor’s use of technology
- 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 ESFA continues to strive for the highest standards of financial management and governance and the latest updates are clearly increasing the work for finance and audit committees going forward. Whether this in turn puts a strain on the sector in terms of willing volunteers remains to be seen.
It is clear the landscape of internal audit (scrutiny) for academy trusts is going to change significantly going forward. Trust boards may therefore have to re-assess their skill set to ensure they have the necessary skills to enable them to receive the level of assurance the AFH2020 is clearly striving for.
We would recommend that the AFH 2020 is read by all those involved in making the decision on behalf of the trust, in particular, Part 8: The Musts – otherwise, are you demonstrating strong governance and financial management?
At Kreston Reeves we can perform a review of your own trust’s compliance with the “musts” as an alternative independent view. If this is something your trust would be interested in, then please do get in touch.
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Karen Sadler TEP
- Trust & Estates Tax Senior Manager
- +44 (0)330 124 1399
- Email Karen[email protected]
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