Beyond the checklist: Preparing for school audits and staying ahead of future challenges

Audits are a complex but necessary part of every school year and are an integral part of evaluating a school's financial operations.

With the impact of the pandemic and the introduction of new regulations, schools are facing a range of complex issues that can affect their financial stability. Schools that use the professional services of a registered and experienced auditor can benefit greatly from identifying areas of higher risk and improving the overall financial management of the school.

To help schools improve the effectiveness of their audit, we spoke to Eric Passaris from Grant Thornton to get his expertise on this topic. Eric is an audit partner who has been working with independent schools for nearly 30 years. He has also been a school Board Member and currently sits on a school’s Finance Committee. Eric provides valuable insights on the current state of the education sector, the impact of regulatory changes and shares his expertise on how schools can tackle the challenges ahead.

Q. What are some common areas that schools struggle with during an audit? And how can schools proactively address them?

An audit is a big undertaking. It requires a significant amount of time and input from school staff which includes, but is not always limited to, the finance team. Auditing standards allow for a degree of flexibility when the scale of the organisation being audited is smaller, but not by much.

For schools, which often have smaller finance teams, the burden of completing an audit is much heavier than organisations with larger finance teams. However, schools can mitigate this with proactive planning and organisation.

The following factors should also be considered for an effective and efficient audit.

Communication

Clear and constant communication between the auditor and the school is paramount. Both sides should agree on how much time the school needs to prepare for the audit, including a realistic time frame for school staff to find and deliver information as requested by the auditor prior to and during the audit.

Both the audit and school teams must agree on when the audit will take place and outline staff availability during the audit period. This ensures the relevant school staff can allocate enough time to assist the auditors and reallocate or reschedule their other day-to-day tasks if necessary.

Live Databases/Availability of Information

Given that most school systems are “live”, there are certain types of data needed for an audit that are only available at a specific point in time, or only available for a limited period of time. This can be problematic when data requirements don’t coincide with the timing of the auditor’s request.

Common examples include student attendance records and census data.

This can be avoided if schools liaise with their auditor before submitting their census data. Once advised by their auditor, schools can retain the specific information needed for the audit, which might otherwise be unrecorded and lost once the census is completed.

Changing regulatory environment

The nature of school operations, the risks facing schools, and regulatory expectations continue to evolve, as do auditing standards.

Unfortunately, this means that both schools and auditors are required to do more work, and with an ever-increasing complexity.

Schools shouldn’t assume that the way an audit was done before, or the information required to do it, will be the same each time a new audit is conducted. The amount of documentation usually increases, especially in areas that need judgement or estimation.

Auditors should communicate the latest changes in audit standards and expectations with schools as early and as clearly as possible. This gives both sides enough time to prepare accordingly and to accommodate any new changes.

Technical Accounting issues

There may be instances where schools do not have the in-house expertise or experience to deal with a particular accounting or audit matter. The school should advise their auditor as early as possible so that the auditor can give help and guidance to those in charge of governance.

Q. How can schools ensure they are fully prepared for audit, from both a documentation and procedural standpoint?

Relationship with the auditor

Don’t view the audit as a once-a-year compliance activity. Build a relationship with your auditor at the management and governance levels within the school. Involve them in planning for the audit before the end of the financial year.

This will enable you to identify accounting issues early, along with any changes in financial reporting or obligations. It also gives management and governance teams enough time to raise issues of concern or seek advice if needed. Early and proactive preparation makes the audit process smoother and prevents potential roadblocks when finalising financial statements and finishing the audit. It also helps the auditor to tailor and share their plan and its information requirements in advance.

Confirm information requirements

Auditors should provide schools with a detailed information requirements list before the audit begins. It should set out what documentation is needed to support the audit.

Schools can help the audit run efficiently and produce high-quality results by making sure the required documents are quickly and readily available.

Prior year findings

If there were any audit adjustments, control findings or recommendations identified in previous audits, the school should ensure they have actioned these and provide an update to the auditor in advance of the current year audit. This helps the auditor avoid identifying recurring issues that were already resolved.

Reconciliations

Throughout the year, schools should be performing reconciliations of their financial information (eg: bank reconciliations).

The information given to the auditor needs to reconcile with amounts recorded in the school’s General Ledger Trial Balance. To minimise the number of follow-up information requests, schools should check that their underlying records clearly reconcile to the Trial Balance, or include a brief note to explain any differences.

Review by those charged with governance

Schools should ensure there is an independent review by Finance Committees or School Councils, particularly in those areas of significant judgement, such as:

The determination of allowances for expected credit losses or impairment of non-financial assets

Complex accounting treatments and sensitive disclosures in financial statements such as contingent liabilities or significant subsequent events

Review of these and other similar matters should be done before the audit is finalised because the School Council is ultimately responsible for the accounting treatments and disclosure of financial statements.

Involve those charged with governance early and seek their input during the process to facilitate a smoother audit.

Q. As an auditor at Grant Thornton, what areas will you focus on for the upcoming school audit period?

A risk assessment is an iterative process throughout the audit and an area of significant judgement.

Auditors will vary in their assessment of risk, which will be informed by their understanding of the school they audit and the environment in which the school operates.

Auditors will also take into account their wider industry experience and their historical experience with the school itself.

Accounting Estimates

Although the risks may vary from school to school, we identified common themes, particularly in areas where estimations are made. For example, long-service leave provisions and allowances for expected credit losses. These estimations are underpinned by significant assumptions. Clearly documenting the rationale behind such calculations will help to shed light on the final accounting estimates.

Changes in accounting policy and non-routine transactions

Complex accounting issues may arise where there are changes in accounting policy or where schools enter into non-standard material contracts. Any changes in policy or non-routine transactions should be discussed with the auditor before the audit. Thankfully there are no significant accounting standard changes that will affect measurement or recognition for the 2022 school year.

Non-financial assets

Schools often manage and maintain a large asset portfolio, which introduces a risk – particularly in the current economic environment – of impairment. The value of the assets held by the school may be lower than the value at which they are recorded in the financial statements. Schools should discuss whether their auditor has identified this as an area of focus for this year, and what information their auditor needs to finalise their work in this area. For example, a paper from management setting out their considerations of whether any impairment indicators exist.

Management override of controls

School finance teams are generally small which means that schools are not able to segregate all incompatible duties or provide the level of independent review and authorisation that may exist in larger teams or organisations. This raises the risk of fraud or error.

Q. How can schools effectively communicate and address any issues or concerns that may arise during the audit?

Once again, clear and upfront communication between the auditor and the school is key for organising and delivering an effective, high-quality audit.

It is important that schools understand areas where expectations are changing or where improvements were expected from the previous year. This will prevent any miscommunications or misunderstandings regarding the information needed by their auditor when completing the audit.

Schools should maintain an open line of communication with their auditor throughout the year, keeping the auditor abreast of relevant updates to the school’s operations and any areas of potential complexity that may affect the audit. That way, the auditor and the school can plan ahead.

While the arrival of COVID-19 accelerated the use of technology, which supports remote auditing, our experience shows that this should not completely replace face-to-face communication. There are benefits to being onsite and where possible, auditors and schools should aim to work together in person.

We encourage schools to have regular ‘status updates’ or catch-ups with their auditor during the audit. This helps to identify and resolve potential problems or blockers quickly and it allows both the audit and school teams to raise relevant findings as the work progresses.

The school management team and finance committee are responsible for the audit itself as well as driving and maintaining a good relationship with the auditor.

Q. What are the biggest challenges facing Australian schools in the next 5 years?

From a purely financial perspective, two of the biggest challenges I see are:

Affordability and Increased Competition

Private schools (in Victoria at least) are facing increasing competition from a better funded government education sector. When combined with increasing inflation and the ‘cost of living crisis’, there is a clear impact on the affordability of these schools (particularly higher SES schools) for an increasing number of families. This challenges the current business model adopted by many private schools. Schools will need to prioritise short-term budgeting and medium-term financial planning, which must be supported by good day-to-day financial management.

Workforce management

With increasing wage rates, changes to wage structures and a trend in reducing teaching loads, schools may have to make difficult decisions regarding the breadth of curricula and extra-curricular programs, classroom sizes, workforce management, and so on.

Ever-increasing expectations around academic performance within the constraints of workforce shortages in the wider Australian economy make it difficult for school management to balance competing goals and demands. There is a common perception that teaching professionals feel underappreciated and have the desire to leave the profession, which adds another layer of difficulty for school management.

Q. How will the integration of technology and shifting demographics impact schools' financial and operational practices?

Demography

I am not an expert in demographics but I did attend a seminar late last year where I listened to John Black from Education Geographics. He made some interesting observations which I have observed in the Victorian schools’ landscape, namely:

The rising participation rates of professional women means that aspirational families can now afford to send their children to private schools

Longer-term changes in religious faith among the Australian born population and overseas migrants will continue to erode demand for faith-based schools, particularly single-sex girl schools

What I have observed is a pressure on enrolments in some higher-fee, established single sex girl schools and particularly in the junior school which tend to have smaller class sizes.

For schools facing enrolment pressures the difficult decisions revolve around implementing growth strategies whilst maintaining present cost structures, versus downsizing personnel and curriculum to better match existing and projected enrolments.

My other observation is that traditionally “academic” schools are now looking at alternative pathways for students, including VCAL and VET options.

Q. Are there specific government regulations or policies that may impact a school’s operations or finance teams that schools can prepare for in the near future?

National Quality Framework

Regulatory authorities administer the National Quality Framework in each state and territory, usually as part of that state or territory’s education department or agency.

Victoria is considered to have some of the more robust governance standards for schools and since 2020 there has been significant reform in governance standards and compliance requirements.

While this is not new, it’s worth reiterating some of the financial compliance requirements in Victoria:

Independent validation of school business plans:

A school’s business plan must be validated by an independent qualified accountant. A signed statement by this independent accountant must be provided. This signed statement should:

Confirm that the review has taken place by the accountant with stated credentials: name, membership of relevant accounting body, signature, date

Confirm the reasonableness of the plan and the underlying assumptions underpinning the plan

ELC Requirements:

Schools must outline what changes were made. They must clarify if money (other than government funding) or property of a school is provided or used to run an early learning centre. And if the ELC is a feeder for enrolments, that the school won’t breach its not-for-profit requirements.

For schools operating or intending to operate an ELC, the VRQA’s evidence requirements are:

Provision within the constitution/governing rules that allow for delivery of ELC services

Separate financial records for the ELC

Taxation

As of 1 July 2022, the ATO enforced the use of Single Touch Payroll (STP) and Superstream as electronic tools to collect both tax and superannuation data from businesses and superannuation funds. Penalties may apply if you haven't started reporting through STP.

Australian Accounting Standards Board (AASB)

The AASB is currently developing Tier 3 accounting requirements for not-for-profit entities, which propose simplifying the presentation, recognition and measurement of requirements as specified by the current Tier 1 and Tier 2 Australian Accounting Standards.

When the Tier 3 accounting requirements are introduced, it’s likely that schools will stop usingthe special purpose financial reporting framework.

The time frame for mandatory application of Tier 3 accounting requirements is unlikely before the 2024 school year.

Q. What steps can schools take to improve their data security and protect against potential cyber threats or data breaches?

According to the Australian Competition and Consumer Commission’s Scamwatch, in 2022 Australians reported more than 74,000 phishing attacks with financial losses of more than $24.6 million. The most popular delivery methods were text messages, phone and email.

Whether it’s ransomware or business email compromise, scammers usually start with phishing because it’s a way of accessing information without authentication. Phishing attacks are becoming harder to recognise and hackers are more adept at impersonation.

Strategies to combat cyber risk need to be multifaceted. Any strategy that relies only on people not clicking bogus links is unlikely to work because the way we do business now inherently requires us to click on links (usually from trusted sources).

So, in addition to training staff, schools should use tools such as multi-factor authentication. They must also understand the technical elements needed for the school to function, such as peer-to-peer file transfers. And if these are not needed, to block them.

Schools should periodically use third-party consultants to perform independent assessments on cyber readiness and penetration testing.

Take a proactive and not a reactive approach! Don’t wait for an attack to change your systems or controls. Identify security gaps, develop a robust policy to mitigate threats and invest in secure infrastructure systems and software.

Q. What services can accounting firms offer schools to help them improve their financial and operational performance beyond the traditional audit process?

Professional accounting and audit firms like Grant Thornton can offer many services beyond the traditional financial audit. We specialise in services to the education sector and more broadly to the not-for-profit sector including additional services like:

Assurance services: internal audit, regulatory compliance reviews and accounting advice

Consulting: governance & risk consulting, technology consulting and IT risk assessments

Financial advisory: financial modelling and financial viability assessments

Tax: Fringe Benefits Tax, Employment taxes, Export Market Development Grants, GST & indirect taxes

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