Academy trusts have been warned that audits will be much tougher, following a number of high profile cases involving auditing issues.
The Financial Reporting Council, the auditing independent regulator, has confirmed that it has revised its “going concern” accounting standard, as a direct response to a number of auditing scandals outside the education sector, including Carillion, Interserve and Patisserie Valerie.
The announcement follows new guidance from the ESFA that trustees and finance staff can expect “more detailed questioning” during the audit process which will focus on a trust’s funding levels and ability to continue operating.
As a result, academy trusts will need to provide greater levels of detail to document their assessment of ‘going concern’, which is defined as an organisation having sufficient funding to meets its financial obligations for at least the next 12 months.
Around 200 academy trusts had financial concerns raised in their 2018/19 annual accounts by their auditors, using “emphasis of matter” opinions to draw attention to particular funding issues. Of these, around 120 – according to the ESFA’s own data – related to a trust closing.
Additionally, figures have revealed that 168 trusts were in cumulative deficit in August 2019.
The ESFA has warned that it will intervene if a trust was judged to have failed as a ‘going concern’, with Government funding in such circumstances was “not guaranteed”.
Where trusts are “assessed not to have a sustainable financial future” a closure or rebrokering warning notice could result.
The ESFA has already begun adding “qualifying floating charges” to trusts in financial distress, which ensures the agency receives priority as a creditor in the event of insolvency.
Trustees are being advised by the ESFA to ensure they fully “understand the numbers” to that they are not be “taken unawares by being involved in difficult conversations with auditors regarding going concern during the audit process”.