Academy Trusts will face tougher financial checks to confirm ‘Going Concern’ in future. Going concern is an accounting term which is essentially a view as to whether or not an entity has the resources needed to continue operating and remain viable in the foreseeable future. A business with a strong balance sheet and adequate reserves will have sufficient funds to meet its obligations, such as payroll and trade creditors.
The Financial Reporting Council has revised its ‘going concern’ auditing standard in light of a number of high-profile cases where companies such as Carillion, BHS and Patisserie Valerie, which were on the brink of collapse, exposed flaws in the audit approach to going concern.
Guidance states that Auditors are required to demonstrate how they have challenged the academy trust's going concern assessment, the rigour with which they have tested this assessment and the evidence and supporting documentation obtained.
This will mean that controls and information used to make a going concern assessment at the academy trust will come under greater scrutiny and trusts will need to provide greater granularity in their going concern assessments and document their assessment of going concern more thoroughly than they do at the moment.
Auditors will evaluate an academy trust's ability to continue as a going concern for a period of at least 12 months from the date the financial statements are authorised for issue – therefore normally covering a period of up to 16 months from the balance sheet date. However, this is not an absolute cut-off and if there are known problems in the months immediately following the expiry of this 12 month period, the academy trustees would be expected to have made appropriate disclosure to that effect. If there is an issue, the auditors are required to consider whether this needs to be reflected in their audit report.
As Academy Trusts have a long-term funding agreement with the Secretary of State, income is considered very secure, but this in itself is not a sufficient basis for accounts to be prepared on a going concern basis. For example, questions regarding short-term viability can still arise in cases of sudden or unexpected loss of third party income which had been earmarked to fund a particular project which will now have to be met from other funds. A going concern qualification on an Academy Trust’s accounts would be a cause for intervention by the ESFA.
The AFH stipulates that management accounts must be shared with the chair of academy trustees every month and with all trustees six times a year to discharge their responsibilities and ensure strong governance and effective financial management arrangements. The volume and depth of financial information provided to both the Accounting Officer and the board will vary significantly depending on the size of the academy trust and the relative complexity of its organisational structure, but the important point to note is that the information received is accurate, relevant, timely and adequately challenged.
| Short term (going concern) | Long term (financial sustainability) |
| Is the current year budget in deficit and, if so, how satisfied are you that steps are in place to recover the situation before reserves are exhausted? | What skills does the board have in relation to strategic financial management? What training is undertaken? How does the board ensure it remains up to date on financial issues? |
| Have we forgotten anything that would increase our outgoings, e.g. rises in TPS employer contribution rates, a rise in teachers’ pay etc.? | Do academy trustees understand the financial information they are looking at and how it has been derived? Is there consistency in reports to allow appropriate analysis for trends? |
| Does the budget for the current year break down into a monthly analysis of all incomings and outgoings? | What benchmarking has the academy trust undertaken both internally, year on year and with other similar schools and academies? |
| Is there an analysis of academy trust creditors which demonstrates an understanding of when each obligation will need to be met? | Does the academy trust have a clear budget forecast for the next 3 or 5 years, identifying spending priorities and risks and sets how these will be mitigated? |
| Are there sufficient reserves to mitigate against unexpected costs? | Are assumptions, such as predicted pupil numbers, being properly scrutinised? Can assumptions be externally verified, such as through the local authority. |
| Does current GAG funding reflect actual pupil numbers on roll? Additional funding may be due, or clawed back. | Are staffing levels likely to remain proportionate to the cohort size over the next 3 to 5 years? |
A good practice guide on Going Concern is available here:
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