Taking on the academy financial challenge

The government’s academies programme has expanded at pace, establishing an exciting new sector within the not for profit market. As charities and companies, academies face the challenges of the interaction of company and charity legislation and the Charities SORP together with fulfilling the requirements of the Department for Education Funding Agreement.
The run up to Christmas can be a very stressful time for academy business managers. The 31 December deadline for filing accounts with the EFA effectively means, taking Christmas into account, financial statements need to be finalised by early December to meet the regulatory deadlines.

2012 saw the introduction of the Regularity reporting regime. Academies also had to prepare for the Academy Annual Return, due for filing by 31 January. Despite these additional burdens, over 87 per cent of academies managed to file their accounts on time, an improvement on previous years.
While there is still time to deal with them, it’s a good time to look at some of the common pitfalls in academy audits, and how they can be avoided.
In my experience of working with academy audit clients, these tend to fall into four key areas: common accounting issues; delivering wider activities; controls for cash handling; and fund accounting.

Common accounting issues
Recognising income and expenditure in the correct accounting period has proved challenging for a number of academies. Many academies I work with don’t really grasp this requirement and consequently only recognise amounts in the balance sheet once an invoice has arrived.
If a service is incurred or an order placed for supplies these liabilities must be recognised on the balance sheet, regardless of whether an invoice for the amount has been received. In accounting terms if you agree to a purchase today, it’s logged against today, even if it’s paid for next week/month/year.
Academy finance teams need a notification process for goods ordered or services E delivered before the year end which have not been invoiced, so that these can be accrued in the accounts. A related issue is that some finance teams date transactions on their posting date rather than using the invoice date. This can result  in some entries being wrongly recognised in the following year’s accounts.

Property and LA leases
Accounting for property can be problematic. Some academies are on short term leases, others on 125- year leases and some are subject to PFI contracts.

Understanding the structure of the property transaction is crucial to accounting for it correctly.
It is common for academies to lease their property from the Local Authority on a short term lease at a peppercorn rent, particularly when they are waiting for a new building to be completed. For accounting purposes, these transactions are regarded as operating leases and the peppercorn rent charged to the Statement of Financial Activities as it is incurred with future commitments disclosed in the notes to the financial statements. As all the risks and rewards of ownership still rest with the Local Authority they are not recognised on the academy’s balance sheet.
Academies may be granted a long lease from the Local Authority for the academy buildings. This is normally for 125 years. In most cases, the risks and rewards of ownership are passed to the academy and it should be recognised as one of the academy’s assets on its balance sheet. The difficulty is calculating how these assets should be valued.
When the asset is a new building and has been ‘gifted’ by the Local Authority to the academy, the cost incurred by the Local Authority may be an appropriate basis for valuing the asset. However, it’s important that the academy understands what is included in the cost to ensure it includes items that it would have capitalised had it been built by the academy itself. Alternatively a value for the building can be obtained by an independent valuer and included as the cost in the financial statements.
Academies can adopt a policy to carry their assets at valuation. This will mean they need to revalue the properties regularly , incurring additional costs. I recommend once a property has been capitalised it should be depreciated over its useful economic life (normally 50 years) and the amount charged to the Restricted Fixed Asset fund.

Delivering wider activities
Academies work hard to maximise the use of their facilities but in the most recent audit filing season I saw numerous examples of poorly-considered VAT and corporation tax issues.
There has been a significant increase in the secondment or loan of staff to trading companies, with recharges between inter-group companies and non-primary purposes trading occurring through the academy.
In many cases these activities are undertaken to either maximise income generation or to be prudent and efficient with staff costs. With careful planning, potential tax issues can be mitigated.
If staff are seconded or loaned to another entity a charge to VAT may arise. This can be mitigated if both entities form part of the same VAT group or if joint contracts of employment are in place. This is particularly important for academies that are not currently VAT registered.

An academy can undertake non‑primary purpose trading through the charity up to a turnover limit of £50,000. Beyond this level activities should be placed in a separate trading company. If non-primary purpose trading activities are passing through the charity it is important that the trustees do not place the charity’s assets at any undue risk.
For further guidance on maximising funds for academies and how these activities should be structured please refer to my article ‘Maximising your Academy’s funds’ at www.crowehorwath.net/UK/industries/Not_for_Profits/Academies/Academies.aspx.

Controls for cash handling
It is essential that there are strong controls for cash handling in operation, regardless of the amounts involved. With the increasing occurrence of fraud in the market, systems can be at risk of manipulation. It is often incorrectly thought that it is the role of the auditor to detect fraud. In fact it is the governors’ responsibility to ensure that there are robust systems in place to reduce the possibility of fraud occurring.

Whenever cash is handled it is important to have more than one person involved to ensure there is a degree of segregation of duty. For example, if a vending machine is being emptied two members of staff should be present to count and record the cash. Quite often this is the case but then one person is left in custody of the cash and records, opening up the system to possible manipulation.
It is particularly important that when cash is being handled outside of the control of the finance department that independent records are kept of any amounts due to be received. This enables the finance department to reasonably predict the amount of cash it anticipates receiving. As an example, if cash is collected for a school trip by a teacher or another administrative department the finance department needs to know how many students are booked on the trip and they sight of any costs associated with the trip so they can calculate the cash due, and quickly identify any anomalies.
Wherever possible, keep cash handling and cash balances to a minimum reducing the academy’s risk of cash frauds.

Fund accounting
Fund accounting has proved problematic for some academies, particularly those who have recently converted. Fund accounting is governed by trust law. The main funds for academies include restricted income funds – the most common income stream this relates to is the General Annual Grant (GAG). There’s also restricted fixed asset funds, including capital grants, and unrestricted funds, which include all monies received which are not subject to any restriction, for example letting income.
The status of unusual income streams needs to be identified when received to ensure that the funds are spent correctly. If a restricted fund is not spent for the purposes it was given, the trustees would be in breach of trust law. On a practical level it is very important to carefully identify any unrestricted funds as these can be spent at the discretion of the trustees. As budgets for GAG funding become more challenging having unrestricted funds to pay for other activities is crucial.
There is a great deal of information to absorb when converting to an academy. Academy heads and governors need the right expertise on board, either advising or as a member of the leadership team, to help them comply with these regulations and add value to their business.

Tina Allison is ICAEW Charity and Voluntary Sector Group member and Head of Academies at Crowe Clark Whitehill

Further information