In April 2023 the ESFA published the Academies Accounts Direction 2022 to 2023 (AAD 23), which is relevant for academy trusts preparing their financial statements for accounting periods ending 31 August 2023.
A link to the new Academies Accounts Direction and the model accounts can be found on the government website.
There are no significant changes compared to the previous Accounts Direction, nor the accompanying auditor framework and model accounts, however the ESFA has provided clarification on a small number of specific areas, as well as providing details of the themes arising from their reviews of assurance work in the sector.
We have set out the key changes below:
- It is acknowledged that the AAD will be most relevant to academy finance teams, auditors and accounting officers, who are directly involved in preparing the financial statements and the year-end process. However, the scope now notes that whilst some trustees may not be required to have a detailed understanding of the technical accounting requirements within the AAD, they may still find it a useful document to help fulfil their financial reporting responsibilities. Our view is that the most useful areas would be those relating to regularity reporting, governance and the statement of trustees’ responsibilities which may assist trustees in their review and ultimate approval of the accounts. In practice, a number of academy trusts provide summaries for their trustees and/or relevant committees summarising, at a high level, the key elements or changes in each AAD, which is a helpful way of demonstrating and documenting good governance procedures.
- A reminder is included in section 1.18 of the AAD around ensuring that there is adequate coverage in the event of key signatories being absent, in particular the accounting officer which is a required role under academy governance requirements. We would expect these provisions to be included in the finance procedures documentation and/or the business continuity planning documents, both of which form a part of our regularity assurance and audit work. Where there is a change of accounting officer around the financial year, it has always been a requirement for the outgoing officer to provide sufficient information and handover to the new officer, and again this is re-confirmed in the latest AAD.
- Some specific guidance has been included in the AAD around how school buildings’ safety risk should be reported in the accounts, including confirming that the principal risks and uncertainties section should cover estate-related risks (section 2.14). The value for money statement and statement of regularity propriety and compliance must also now reference estates management specifically, and it has been suggested that an example describing how the Trust has used funds to maintain and keep the estate safe would be good practice. The auditors framework confirms that the auditors are not required to perform any specific procedures regarding trusts’ compliance with estates safety and management requirements.
- Whilst many academies do not have significant levels of borrowing arrangements in place, certain arrangements are becoming more prevalent in academy accounts, including Salix and other ESFA-approved loans. The AAD 23 now references the guidance with the charities SORP around concessionary loans, which are loans received to further a charitable organisation’s purposes and where interest is charged at below market rates. These loans can either be accounted for at the amount received less repayments or ‘fair value’, and in practice as ‘fair value’ would involve more complex calculations, it is more common to adopt the cost less repayment option. However, certain additional disclosures are required in respect of concessionary loans even if the more simple accounting option is adopted, including details of the rates applied and security arrangements.
- The ESFA has also clarified that teaching assistants should be categorised as support staff not teaching staff within the employment costs to the financial statements (section 2.137).
In addition to the above, the ESFA has also provided feedback on their review of the accounts and assurance work following the financial year 2021-22 compliance, and their key areas of note are highlighted below:
- There were a number of areas where the ESFA believed academy trusts could be more specific in their trustees’ report, both in terms of updates from the prior year or insufficient tailoring of the model accounts.
- The ESFA also noted omissions in the financial statements in the areas of structure, governance and management disclosures, and disclosures around internal scrutiny, and naming any staff who are also trustees. They have also reminded trusts that processes in place to manage conflicts of interest should be adequately described in the accounts, and that they would expect these processes to extend beyond obtaining declarations of business interests.
Alongside the updated AAD, the framework and guidance for academy auditors has also been updated which provides details of the main areas of academy.
Updates to auditing standards
For accounting periods commencing on or after 15 December 2021, there have been some updates to auditing standards, which will impact academies for the first time in the 2022-23 financial year. The two revised standards are ISA (UK) 315: Identifying and Assessing the Risks of Material Misstatement and ISA (UK) 240: The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements.
The main changes include:
- Modernising and updating the standard for an evolving business environment including requiring the auditor to understand the use of IT, the related risks and the system of internal control addressing such risks.
- Updating the standard for the increasing use of automated tools and techniques.
In practice, the main change from the perspective of our clients relates to the requirement for the auditor to undertake a more detailed review of the IT systems overall (not limited to the finance system), including for example how data is stored, accessed, and backed up, and walking through the key controls in these areas, and considering how they may lead to risks within the financial statements.
There is also a greater focus on professional scepticism, meaning we must ensure that our audit procedures are not biased towards obtaining audit evidence that may be corroborative or excluding evidence that may be contradictory to the position presented to us.
The revisions also introduce a new requirement to make inquiries of your staff within the business who deal with allegations (if any) of fraud raised by employees or other parties.