Internal audit support for the budgeting process

Getting both the budget right and the process by which it is arrived at and then managed is imperative for trusts. Indeed, ensuring the process is reasonable, with appropriate buy-in and ownership from all involved, should mean that the end results – the budget – is in better shape.

Internal Audit can support the budget setting and management process in a number of different ways. As well as the usual headline review of whether budgets are set, approved properly and then reported on regularly and to stated timescales, some things to consider that your internal auditors could help you review include:  (this could also serve as a useful check you can use yourself to make sure you’ve considered everything you need to):

• Budget setting – auditors can challenge or corroborate underlying budget assumptions, and ensure that there is sufficient support or evidence where applicable. 
• Auditors can assess the understanding, engagement and local ownership of the people involved in the process – are budgets perceived as “imposed from central” or truly locally influenced? This can be the perception especially through larger devolved MATs where each school prepares its own budgets and then these are collated and consolidated (and hopefully challenged) at Trust level. 
• Is income allocated to schools from the central trust according to forecast expenditure / need, or top-sliced from income attributable/derived from pupil numbers, or an alternative method? Is whatever method used “accepted” by those tasked with setting and then managing the budget locally? 
• Are there board level discussions regarding financial strategy link to the trust’s overarching strategy(ies)? Ie does the budget / longer term financial forecast reflect and effectively “cost out” the delivery and achievement of the trust’s strategy for that period? How is this evidenced? 
• Where there is a deficit forecast, is there a suitable recovery plan in place? Is it achievable in practice (how does this trust know?)
• Are budgets based on previous years or zero-based, starting with a fresh “application” each year based on that year’s need, supported by evidence? Auditors can also review actual spend profiles across periods against forecast profiles (where these are set), which also helps to identify if certain (generally non-pay) budget lines with remaining allocations in say month 9 or 10 are fully drawn down / spent by the end of the year. This is not necessarily bad practice (it is an allocated budget to be used after all), but is there a culture of “use it or lose it”, especially where next year’s budget is based on this year’s actual expenditure? Schools should perhaps be rewarded for not spending unnecessarily in the last few months of the year in the (arguably rare!) situations that budget lines remain unspent.
• Has there been any form of sensitivity or scenario planning employed when setting the budget? What scenarios were considered? What are the early warning signs or trigger points that would indicate that the year is moving from “best guess” to “pessimistic”? When / how would the trust know this, and what would they do in response? Has this been planned up front as part of the scenario testing?
• Is there a consistent approach to budget virements? Are they challenged and require formal explanation and approval? What about “reforecasting” or “revised budgeting” mid-year – is this permitted, and if so how is it monitored / controlled?
• Audit can also review related processes for compiling and submitting returns – for example, Census data, both from a data / evidence point of view but also to see whether there was sufficient challenge as part of the formal approval process.

Once the budget is set, audit can also look a various key elements of the budget management and monitoring conducted over the course of the year. For example:

• Budget review – is there clear evidence retained of the challenge and review that should take place each month (usually via budget holder meetings). As above, engagement and (local) ownership is key to success here. 
• Are there clear explanations provided (and recorded) for variances? If there is anything “a surprise” or unexpected, is this separately flagged and explained? Does this happen repeatedly? If so, are there any themes or linked causes? Finally, are there ever any “lessons learned” that are collated and in turn feed in to refresher or update training for all budget holders? 
• Do budget holders get any form of training or guidance that explains what’s required of them and their related responsibilities?
• Is there a clear and reconcilable link between detailed budget profiling and cashflow forecasting? Do changes in one inform the other? 
• Finally, internal audit can review (and validate / corroborate) the summary budget position as reported in monthly management accounts, to provide Finance / Audit Committee and Board with assurance regarding the reported financial position and the fact that it has been properly summarised / reported accurately based on the source data.

Of course, all of the above can take the form of a much more detailed Due Diligence review, where each line and assumption is separately and rigorously challenged.

However, this would not normally be possible for most “normal” internal audit reviews. Internal audit would instead focus on the assurances available that the process for setting and then monitoring is properly defined, disseminated, understood and complied with, and would also seek to verify that, that given all this, it is also effective at achieving a properly transparent, understood and explaining budget position.

It is of course important to carry out a fuller more granular Due Diligence review of budgets and related assumptions for any incoming schools joining the trust, to ensure these are appropriate and supported, and in line with the trust’s existing approach.

If you would like to discuss any aspect of the above or to have a conversation regarding how it can apply to your trust, please contact us.