Key Changes to the Academies Financial Handbook (AFH) 2019
Earlier today the ESFA published the Academies Financial Handbook 2019 (AFH2019) and this will replace the 2018 version with effect from 1 September 2019.
A full copy of the handbook can be found here.
In recent website articles and meetings with our clients we have been stressing that Lord Agnew believes that the bad publicity headlines for academies often arise due to weak governance arrangements. The ESFA are also keen on Trusts improving their Internal Audit arrangements. It should therefore come as no surprise that some of the changes in this version of the AFH focus on these areas for 1 September 2019 onwards.
So what has changed from the 2018 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 8) 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.
AFH2019 1.11 stresses the need that trustees must ensure robust governance with a clear reference to following the latest Governance Handbook and the key features of governance:
- Strategic leadership
If Trust Boards haven’t already, then now would be a time to have a good read through the Governance Handbook to ensure you are up to date.
Key change! The AFH now includes an expectation that Trust’s should appoint a clerk to the Board of Trustees and that this person is not someone who is a trustee or the accounting officer of the Trust (AFH2019 1.38).
At Kreston Reeves we always stress the importance of having a strong clerk in place as their role is invaluable to the Board. You may wish to take the time to remind yourself why this role is important from our article here.
AFH2019 2.51 to 2.55 provides further emphasis on when to inform the ESFA about key changes in the key individuals in Trusts. As a reminder, if any members, trustees, or the accounting officer and chief financial officer leave/join then the ESFA must be informed within 14 calendar days.
Trusts are now being encouraged to consider their estates management as part of their budget planning. AFH2019 2.14 encourages Boards to refer to the DfE’s Good estates management for schools guidance to help manage capital assets and budgets.
The content of management accounts is a question we find is often raised by Trusts as the previous guidance has been less clear on what should be included. This has now been clarified.
Firstly, management accounts must be prepared every month (AFH2019 2.18). Secondly, they must include an income and expenditure account, variation to budget report, cash flows and balance sheet as a bare minimum (AFH2019 2.21). Failure to include any of these reports would result in non-compliance with the AFH.
Finally, management accounts must select key financial performance indicators and measure their performance regularly (AFH2019 2.22). We would therefore recommend including these within your management accounts pack for Trustees to ensure this process takes place regularly.
Another continued hot topic has been the one centred around Executive Pay with the level of scrutiny increasing each year.
The latest AFH now clarifies that Executive Pay not only includes salary but other benefits too (e.g. pension), which should be factored into the considerations. Whilst some leaders receive significant rises in salary, the considerations taken by Boards does not always include the impact on pensions and any other benefits provided. AFH2019 2.30 and 2.31 now covers this.
AFH2019 2.32 reminds Trusts to publish gender pay gap information (where applicable) on the government’s reporting website as well as their own.
AFH2019 2.33 reminds Trusts that senior managers with significant responsibilities (so not just accounting officers) should be on the payroll and subject to PAYE and NI deductions.
Key change! AFH2019 2.36 now states Trust must have a risk register in place and it must be maintained. Previously this was a “should” requirement. The risk register is a key document which should help drive the focus of the internal audit function (more on that later).
Key change! AFH2019 2.42 and 2.43 state that Trustees must approve the whistleblowing policy/procedure. Previously the guidance in this area was rather weak. AFH2019 2.44 to 2.46 then goes on to stress that the Trust must ensure all staff are aware of the process (some Trusts have theirs displayed in the staff toilets!) and that the Trust must ensure all concerns are responded to in a fair manner.
Internal Scrutiny – Key Change!
The biggest changes to the AFH all relate to the internal scrutiny of the Trust (essentially the internal audit). Again, this is something we have been stressing to our clients this year and again in a recent article on our website.
AFH2019 3.2 states that internal scrutiny must focus on:
- evaluating the suitability of, and level of compliance with, financial and other controls. This includes assessing whether procedures are designed effectively and efficiently, and checking transactions to confirm whether agreed procedures have been followed
- offering advice and insight to the board on how to address weaknesses in financial and other controls, acting as a catalyst for improvement, but without diluting management’s responsibility for day to day running of the trust
- ensuring all categories of risk are being adequately identified, reported and managed.
AFH2019 3.5 makes it clear that the process must have appropriate reporting lines. Essentially the internal audit function reports directly to the finance and audit committee – not the Chief Financial Officer.
AFH2019 3.8 to 3.11 reiterate the remit and membership of any audit committee, even where included as part of another committee (typically, finance). Key points to note include that the Chair of Trustees should not Chair the committee and employees should not be members or participate as members when audit matters are discussed.
AFH 2019 3.12 to 3.14 covers how the committee should operate and what tasks should be undertaken. Trusts should revisit these and ensure their terms of reference are compliant going forward. Trusts must also consider the accuracy of pupil number returns and funding claims.
Key change! AFH2019 3.15 discusses how internal scrutiny is to be delivered. The key “must” points here are that a programme of work is in place and focusses on the high risk areas (from your risk register) and that regular updates are provided to the committee. These updates specifically include the reports reflecting the specific visits made and a short annual summary for each year to 31 August outlining the areas reviewed, key findings, recommendations and conclusions to help the committee assess year on year progress. This is a significant change.
Key change! AFH2019 3.22 also states that the Trust must submit the annual summary, mentioned above, to the ESFA by 31 December each year with its annual accounts etc.
However, it is not clear from the guidance if this is for December 2019 onwards OR 2020. We are currently chasing the ESFA for clarification on this matter and will clarify this here once we know more.
Update on 1 July 2019: The ESFA have now confirmed that the annual summary applies for the 2020 autumn NOT 2019. So the annual summary will be filed for the first time in December 2020. Therefore Trusts will have a good period of prepare however, we would urge Trusts to start to consider their scoping for 2019-20 as soon as possible so that arrangements are in place.
Most of the changes in this section serve as enhanced remainders to Trusts on certain rules such as the need to ensure certain transactions receive prior ESFA approval before being entered into.
The latest Related Party transaction rules are now included in AFH2019 5.40 to 5.42 which came into force earlier this year.
Regulator and intervention – Key change!
This is a new area introduced to the AFH but has not been significantly flagged by the ESFA in their own key changes summary. Therefore Section 6 should be read in full to ensure its contents are fully understood.
Those Trusts unfortunate to be subject to a Financial Notice to Improve (FNtI) must now publish the FNtI on their website within 14 days of being issued and retain this on the website until it is lifted (AFH 2019 6.15).
AFH2019 6.17 provides a reminder of the powers which are revoked once a FNtI is issued.
AFH2019 6.19 to 6.23 clarify the powers of intervention the Secretary of State (SoS) has to deal with those who do not manage an Academy Trust appropriately in their eyes. These include:
- SoS can remove members of trustees
- SoS can prohibit individuals taking part in academy trust management e.g. member, trustee or executive leader
- ESFA may refer cases to the Charity Commission
- ESFA may refer trustees to the Insolvency Service
The ESFA continues to strive for the highest standards of financial management and governance and the latest updates are a clear indication the ESFA means business which is what many have been demanding.
Right now, more than ever, Trusts need to ensure their governance arrangements are as robust as possible.
We would recommend that the AFH 2019 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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