Department for Education accounts slated for material errors

The head of the National Audit Office (NAO), Amyas Morse, has issued a critical assessment of the latest Department for Education’s (DfE’s) group financial statements, stating that the level of error and uncertainty is ‘both material and pervasive’, due to failure to account correctly for spending by academy trusts

Morse has also qualified his regularity opinion because the department has exceeded three of its expenditure limits authorised by parliament.

NAO’s report on the issues says that since 2012-13, the DfE’s group financial statements have consolidated the financial statements of academy trusts, alongside those of the department itself. For 2014-15, this included 2,824 academy trusts that operated 4,900 academies.

While the department must produce its financial statements by a year end of 31 March, the trusts have a year end of 31 August. The NAO says this presents the ‘significant challenge’ of preparing financial statements which provide a true and fair view of the financial activity for the period in question and the financial position at the end of that period.

In its report, the NAO points out that IFRS 10 Consolidated Financial Statements recognises that group financial statements may comprise bodies with different accounting periods but limits the allowable difference to three months.

The NAO says the DfE has chosen not to change the reporting period for the trusts, and nor has it requested a second set of statements to cover the period to the end of March, on the grounds that the extra resource needed would be better spent on providing education.

Instead, the department has sought to prepare the group financial statements by using the academy trusts’ financial statements to the end of August and then making adjustments using centrally collated information where necessary.

Morse states that this approach does not give a true and fair view of its financial performance or position, nor does it provide the required accountability to parliament.

Academy trusts - accounting issues

In addition, the DfE did not meet the original statutory reporting deadline which was to submit to the C&AG its signed 2014-15 financial statements by 30 November 2015, largely due to the complexity of consolidating 2,824 academy trusts with year-ends that do not match that of the group, combined with issues relating to the significant expansion of the capital programme within the Education Funding Agency.

The DfE and the Treasury are currently developing an alternative approach to accounting for academy trusts. The preferred option is to remove the academy trusts’ financial results from the department’s group financial statements and to reflect only grants paid to academies. The DfE would then prepare a separate aggregated account for academies as at 31 August, called the ‘sector report’.

NAO says this would resolve the consolidation issue, but would not address all of the causes of error and uncertainty and limitations which had been identified, such as the recognition of land and buildings.

The report states the DfE has made a central adjustment for land and buildings rather than consolidating the balances included in the financial statements of academy trusts. This is because academy trusts prepare their accounts in accordance with Accounting and Reporting by Charities: Statement on Recommended Practice (the Charities SORP).

NAO says the department has made an assumption that all land and buildings used by academy trusts should be capitalised within the group statement of financial position, but warns this may not comply with the requirements of International Accounting Standards and Treasury guidance, for example where buildings are occupied on a short term lease or are owned by another entity.

It also claims the department does not have robust data to demonstrate that its assumption is appropriate, so it is not possible to determine the extent of land and buildings assets that may be erroneously capitalised in the consolidated statement of financial position.

The DfE has said that collecting the required information would be very costly, with estimates of over £20m to collate the information and between £5m and £10m to keep it up to date, and has rejected the idea on value for money grounds.

Morse said: ‘Providing Parliament with a clear view of academy trusts’ spending is a vital part of the Department for Education’s work – yet it is failing to do this. As a result, I have today provided an adverse opinion on the truth and fairness of its financial statements. The department will have to work hard in the coming months, if it is to present Parliament with a better picture of academy trusts’ spending through the planned new sector account in 2017.’

The NAO report , The Report of the Comptroller and Auditor General on the Department for Education’s 2014-15 financial statements, is here

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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