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AIA

Guide to auditing academies in 2013

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3rd Sep 2013
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Audit firms with academies as their clients will be turning their attention to the 2013 audits and undoubtedly digesting the content of the latest Academies: Accounts Direction 2013 (AAD 2013) which was issued by the Education Funding Agency (EFA) in May 2013, explains Steve Collings.

This article will examine some of the main issues required for reporting on regularity, propriety and compliance.

The issue of ‘regularity’ was introduced in the 2011/12 audits and replaced the former ‘use of funds’ opinion. It also enabled the EFA to remove the requirement for academies producing 2011/12 financial statements from completing a financial management and governance evaluation. Aspects concerning regularity are contained in the AAD 2013 in part 10 and this part outlines the regularity reporting requirements relevant to the August 2013 audit. The guidance is twofold: One part is directed specifically at the academy’s accounting officer (which in the vast majority of cases will be the principal) and the other part is aimed at the regularity auditor.

The word ‘auditor’ in the context of regularity and propriety is somewhat a misnomer - however this article will refer to ‘auditor’ for consistency with the AAD 2013. This is because the regularity requirement is that of a limited assurance report and therefore the academy auditor is not ‘auditing’ regularity or propriety and is not, therefore, giving ‘reasonable’ assurance. 

Addressing regularity and propriety

Public money must be used only for approved purposes and this is the overarching objective of ‘regularity’. The term ‘propriety’ is discussed in paragraph 10.2.7 to the ADD 2013 and is concerned more with standards of conduct, behaviour and corporate governance. Paragraph 10.2.8 goes on to acknowledge that propriety is less prescriptively defined but includes matters such as:

  • fairness
  • integrity
  • the avoidance of private profit from public business
  • even handedness in the appointment of staff
  • open competition in the letting of contracts
  • avoidance of waste and extravagance

To ensure the academy achieves the objectives where regularity, propriety and compliance are concerned, paragraph 10.2.9 outlines certain considerations that accounting officers should consider in determining whether a transaction is regular and proper and of benefit to the academy trust:

  • is the expenditure in the best interest of your organisation
  • does the expenditure comply with approved procurement rules and policies
  • will there be a valid business benefit to the organisation from the expenditure and not just personal benefit to an employee
  • is the expenditure necessary
  • is the expenditure reasonable, meaning - does it fully meet the identified and agreed needs
  • has the expenditure been properly authorised

Statement on regularity, propriety and compliance

The academy’s accounting officer is responsible for making a statement on regularity, propriety and compliance as it is the accounting officer who is personally responsible to parliament for the resources that are under their control during the financial year. The statement itself is a formal statement and the model accounts ‘Coketown Academy Trust Limited’ in the AAD 2013 illustrates the format at section 10.7.

In forming their conclusion on regularity, propriety and compliance, the academy’s accounting officer will consider the academy’s internal control processes and the work that has been carried out throughout the year as part of their oversight of internal controls, such as:

  • review of management reporting documents
  • review of trustees’/governors’ minutes
  • confirming compliance with the academy’s Scheme of Delegation
  • ensuring outcomes and recommendations from the FMGS report have been implemented
  • adherence with tendering policies

In arriving at their conclusion, accounting officers can also consider the work of the audit committee with a view to drawing comfort from their work as well as the responsible officer and internal auditor (or equivalent) which provides a process for independent checking of financial controls, systems, transactions and risks. Where internal control processes have operated effectively throughout the year, there will not be a need for significant additional scrutiny.

Illustrative statement on regularity, propriety and compliance

Page nine of the AAD 2013 gives an illustrative statement on regularity, propriety and compliance which is made by the accounting officer and is reproduced here:

Coketown Academy Trust Limited

Statement on Regularity, Propriety and Compliance

As accounting officer of Coketown Academy Trust I have considered my responsibility to notify the academy trust board of trustees and the Education Funding Agency of material irregularity, impropriety and non-compliance with EFA terms and conditions of funding, under the funding agreement in place between the academy trust and the Secretary of State. As part of my consideration I have had due regard to the requirements of the Academies Financial Handbook.

I confirm that I and the academy trust board of trustees are able to identify any material irregular or improper use of funds by the academy trust, or material non-compliance with the terms and conditions of funding under the academy trust’s funding agreement and the Academies Financial Handbook.

[Either]:

I confirm that no instances of material irregularity, impropriety or funding non-compliance have been discovered to date.

[Or]:

I confirm that any instances of material irregularity, impropriety or funding non-compliance discovered to date have been notified to the board of trustees and the EFA or, if occurring after the date of this statement, will be notified to the board of trustees and the EFA.

[Signed]

[Name to be typed]

Accounting officer

In making their statement, the AAD 2013 acknowledges that the accounting officer is not required to produce any specific documentation in support of their statement, although it may be beneficial for the officer to retain a file which documents the work that has been carried out during the year in order to:

  • allow the academy greater background information to inform their report
  • protect the accounting officer
  • assist with auditor’s questions

Auditor’s responsibilities

The form of report to be issued where the statement of regularity, propriety and compliance is concerned is that of a ‘limited assurance’ report and therefore no opinion is expressed but instead a conclusion is formed.

In situations where the auditor does discover instances of material irregularity (whether material in amount or material in nature), the academy auditor must qualify the report and include full disclosure of those matters. Such matters will also be addressed in the management letter that reports on significant matters arising out of the statutory audit. 

Guidance has been provided in section 10.4 Evidence to support opinion on regularity to assist auditors in determining the types of tests that can be used to provide evidence on the regularity report, but it is important to emphasise that the guidance is not exhaustive (particularly in light of the fact that the form of the report is ‘limited’ assurance). This guidance can be found on page 123 of the AAD 2013, although it is expected that many work programmes will contain the relevant tests, which, of course, should be tailored accordingly depending on the auditor’s judgement and levels of risk assessed. 

Engagement terms

Engagement terms are considered in AAD 2013 at section 10.5 on page 124, and in relation to the auditor’s work on regularity, audit firms must ensure the following paragraph is included in the engagement letter:

“The Secretary of State for Education acting through the Education Funding Agency has adopted the Standardised Terms of Engagement included within the Accounts Direction dated May 2013.  We will report to the Secretary of State for Education acting through the Education Funding Agency in accordance with those Standardised Terms of Engagement for Independent Accountants’ Reports.  The Secretary of State for Education acting through the Education Funding Agency will not be required to sign this engagement letter.”

The terms of reference contain the following provisions:

  • Introduction
  • The academy trust’s responsibilities
  • Scope of the auditor’s work
  • Form of the auditor’s report
  • Liability provisions
  • Fees
  • Quality of service
  • Provisions of Service Regulations 2009
  • Alteration to terms
  • Applicable law and jurisdiction

Other issues relevant to 2013 audit of regularity, propriety and compliance

The guidance in the AAD 2013 has been developed through a working group of the Academies Finance and Assurance Steering Group as well as input received from audit firms themselves and the National Audit Office. The EFA has acknowledged that the guidance is not as extensive or prescriptive as some auditors might wish, but this reflects the diversity of the academies’ sector and ongoing pressure from the sector on levels of work and fees. Among other issues, the AAD 2013 emphasises the importance of integrating work with the true and fair audit as well as work on the accounts return. The levels of work done by the auditor on regularity, propriety and compliance is all determined by their risk assessment, however, by definition, the term ‘limited assurance’ will mean that less work is undertaken than would otherwise be done under a ‘reasonable assurance’ approach. At the planning stage of the audit the auditor must have an understanding of what the relevant authorities are, in accordance with:

  • ISA (UK and Ireland) 250A Consideration of laws and regulations in an audit of financial statements
  • ISA (UK and Ireland) 315 Identifying and assessing the risks of material misstatement through understanding the entity and its environment

The AAD 2013 outlines the authorities as follows:

  • the academy trust’s articles of association
  • the academy trust’s funding agreement
  • the handbook
  • the accounts direction
  • charities legislation
  • Charities Commission Guidance
  • specific terms and conditions relating to individual elements of funding or funding from other sources

The EFA has confirmed that the starting point is with the accounting officer’s statement and supporting evidence together with either the financial management and governance statement or previous year’s audit work on regularity. 

The EFA is relying wholly on the professionalism of audit firms and as a result there will not be a requirement to have the work done on regularity, propriety and compliance documented in a separate file, nor will the EFA require access to auditors’ working papers.

2011/12 regularity findings

The EFA reported that 2011/12 saw few regularity issues being raised by both academies’ accounting officers and their external auditors. However, the EFA did raise the point that there were inconsistencies and ‘very few’ with significant regularity issues. In total, the 2011/12 audits contained 32 qualified opinions raised by 15 audit firms. The qualifications arose in three common areas as follows:

  • Lack of consent from the Secretary of State for certain types of severance payments to staff
  • Lack of consent from the Secretary of State for leases; most commonly operating leases over three years
  • Lack of consent from the Secretary of State for borrowing

The Academies Financial Handbook has been clarified and now outlines the circumstances in which academies must obtain the consent of the Secretary of State and as a result, the EFA is expecting such issues to see a reduction in 2012/13.

Conclusion

The work on regularity, propriety and compliance is of fundamental importance and procedures adopted by audit firms must be proportionate in light of the assessed levels of risk. The EFA did mention that in 2011/12, some audit firms had missed the requirement to produce a report on regularity, propriety and compliance, but that all these reports were received when the EFA contacted the relevant audit firms. 

Steve Collings is the audit and technical partner at Leavitt Walmsley Associates and the author of ‘Interpretation and Application of International Standards on Auditing’. He is also the author of ‘The AccountingWEB Guide to IFRS’ and ‘IFRS For Dummies’ and was named Accounting Technician of the Year at the 2011 British Accountancy Awards.

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