The August 2024 edition of ESFA financial regulations handbook marks a significant shift for smaller Independent Training Providers (ITPs). These providers, who previously avoided the annual regulatory financial audit, now find themselves pulled into the fold.
If your business accesses more than £1 million in ESFA funding per year, you’re now required to submit audited financial statements, regardless of whether your company would ordinarily be exempt.
But what exactly is an annual financial accounts audit, and how can you best prepare to navigate this new regulatory landscape?
What is an Annual Financial Audit?
Typically, annual financial audits are required for limited companies, charities, and other entities filing accounts with Companies House or the Charity Commission. Businesses can claim exemption if they meet at least two of the following criteria:
✔️ Turnover less than £10.2 million
✔️ Assets under £5.1 million
✔️ Fewer than 50 employees
However, for ITPs accessing over £1 million in ESFA funding, the small company exemption no longer applies. Even sole traders or partnerships may now be required to undergo an audit if they fall under this category. The key focus of the audit will be on three critical aspects:
1: Are your financial statements free from material misstatements (i.e., are they reasonably accurate)?
2: Do you have robust internal controls and processes to prevent misstatements?
3: Is your business likely to remain a going concern beyond the audit date?
A failure in any of these areas will trigger serious consequences, including:
❌ A qualified or negative audit report, which must be submitted to the ESFA.
❌ A management letter outlining internal control weaknesses, shared with the ESFA.
❌ A qualified or negative opinion on whether your business can continue as a going concern.
If unprepared, the fallout could be severe. Though the ESFA has not explicitly stated the repercussions of a negative audit, it’s reasonable to assume it would impact your financial health score, ultimately affecting contract awards, retention, and future growth.
Preparing for Your Audit: Five Key Steps
Preparation is not just important—it’s crucial. Here are five essential steps to ensure your business is ready for the upcoming audits:
1: Strengthen Your Financial Team
Is your current finance team capable of handling an audit? If you’re a small operation with just a bookkeeper, the answer is likely no. At a minimum, you’ll need an experienced and qualified Finance Manager. Larger ITPs may even require a fractional Finance Director (FD).
Keep in mind that your external accountants can’t handle this process for you if they also conduct your audit, as it would present a conflict of interest.
2. Review Your Accountancy Arrangements
Not all accountants are licensed to conduct audits, so you may need to find a new firm that can both prepare your year-end accounts and audit them. Even if your current firm can conduct the audit, their relationship with you will change—they will need to maintain an independent stance. Also, remember that your Audit and Risk Committee should be responsible for selecting and appointing the auditor annually.
3. Take Control of Your Balance Sheet
The audit will heavily scrutinize your balance sheet. Ensure all assets, liabilities, and provisions are accurately recorded and supported with proper documentation. Strong use of accruals-based accounting and control accounts is vital.
4. Establish Strong Internal Controls
Ensure you have documented processes that cover critical areas of your business, including:
- Monthly ILR submissions and learner withdrawals
- Expenditure authorizations and payment processes
- Staff recruitment, contracts, pay, and bonus approvals
- Expense policies and journal entries into your accounting software
The audit will scrutinise how well your business manages these processes, so make sure they are robust and transparent.
5. Prepare Projections to Prove Your Going Concern Status
You will need profit and loss statements and cash flow projections that extend at least 12 months beyond your year-end. These documents will provide auditors with confidence in your business’s ability to continue operating beyond the audit date.
Brace for the Costs
An audit will introduce new costs to your business. Expect to pay anywhere from £6,000-£8,000 annually for the audit alone—far more than what you currently spend on year-end accounts. And if your internal team lacks the skills or experience to manage the process, you will need to invest in strengthening your team. Cutting corners here could leave your business vulnerable to devastating consequences.
Martin Ridgeway is a qualified accountant, spending the first decade of his career working for a top 10 firm of accountants leading teams carrying out annual financial audits for a portfolio of clients. After leaving practice, Martin spent 15+ years as CFO/FD for independent training providers managing ESFA, DWP, and ESF contracts.
If you’re concerned about your audit readiness, GJC is here to help, just fill in the form below and let us assess your audit readiness and provide the guidance you need to ensure a smooth and successful audit process
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