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Now is the perfect time for an internal audit. Clive Malcolm outlines the potential risks facing independent schools over the coming months and explains the pitfalls of not carrying out an internal review

The credit crunch is starting to bite throughout the economy and independent schools will not be exempt from its effect. Although the first indicators are that pupil numbers are holding up in 2009, some schools are seeing a decline in numbers as parents take stock of their financial position. Lower numbers mean that it will be harder for schools to cover fixed costs.

The news is not unremittingly bad. Bargains are still to be had as suppliers and contractors react to the economic climate and trim their profit margins to win business and avoid laying off staff. It is the right time to take a long, hard look at where economies can be made.

Governors, headteachers and school managers must react to the changed circumstances and develop or refine skills that will enable them to survive and thrive in the current economic circumstances. The only certainty is that today’s risks are different to those of a year ago and a response based on old policies, perspectives and procedures is almost certainly wrong.

Internal audit in schools
In this context it is worth looking at what internal audit involves. The role is closely linked to risk management, a discipline with which most schools are keenly familiar in the context of health and safety.

Good internal auditors are good listeners; they will recognise that teachers know more about education than they do and that an estates bursar will know more about property management than they do. The strength of the role is where there is an understanding of risk and the structure of control. An auditor will identify potential problems that may sometimes seem theoretical or remote, and probe into the things that the school does to stop them causing major difficulties.

It is important to remember that some of the biggest problems come from the most unlikely sources. Perhaps the most famous example was in 1991, when the Ratner group nearly collapsed after the chief executive said in a private after-dinner speech that some of the jewellery the group sold was “cheaper than a prawn sandwich, but probably wouldn’t last as long”.

Frauds and internal thefts are often perpetrated by the most trusted employees; in a school, the lack of control over monies collected for school trips might tempt even a usually honest member of staff to break the law.

A risk-based approach
These things should make us think. Risk is always with us. Recently, local authorities have lost money in the collapse of Icelandic banks. Some of these authorities appear to have deposited money without due checks on their creditworthiness.

Internal audit is not only there to ask about policies and about how procedures should work; it also checks that what should happen is actually happening in practice. Are CRB checks being carried out? Are reconciliations being carried out on cash and fees in advance? Are insurance covenants being observed? Too often the assumption is made that things are happening as is expected, but without any independent checks to confirm it. If these important steps have not been taken, you will often get away with it, but when you don’t, the effects can be dramatic and sometimes catastrophic.

In difficult times it is easy to concentrate only on things that can go wrong, but the job of an internal auditor is also to look for opportunities to make a positive contribution that might be overlooked, such as imaginative financial modelling, which build in different scenarios, or rethinking business models for charging for external use of school facilities.

Adding value
Many schools are reluctant to think about internal audit, regarding it as an added expense. There is a feeling that the ISI is already providing an external, objective assessment of how the school is doing, although this only relates to educational quality. Where a school is confident that the academic and educational issues have been addressed, the scope of a potential internal audit can be restricted to the financial and operational issues that affect viability and legal compliance.

It is possible to do without an internal audit but when you do, it is highly advisable to have an internal checking mechanism that effectively applies the disciplines that an internal auditor would apply. This involves stepping back, looking at the school’s key objectives and considering what could stop the school achieving them. It also involves reviewing the effectiveness of the steps that the school takes to mitigate the effect of those risks: these steps may include control procedures, contingency plans, insurances or outsourcing arrangements for non-core functions. You can then make a conscious decision to accept the risk as it stands or take positive action to reduce the school’s exposure.

The key to the effectiveness of this sort of approach is finding the right person to undertake the review. It might be a governor or a senior member of staff. Whoever it is should have the time, authority and objectivity to make assessments without fear or favour and preferably with the benefit of experience drawn from other institutions where other approaches may have worked. All too often a person meeting these criteria is not available and it is then that you may consider establishing some form of internal audit capability.

Understanding your needs
For schools in the state sector, internal audit is a normal occurrence, usually carried out by the local authority’s internal audit department and following a fixed programme. In the independent sector, internal audit will usually be carried out by privately engaged specialists from firms experienced in the sector.

Most schools have not had internal audit before. If you are now considering it for the first time, there are choices that need to be made about the scope, extent and timing of work.

Cost will always be a major consideration and a discussion with potential providers of these services will help to identify the benefits that an internal audit can bring, and whether in these hard times the balance between cost and benefit is right for your school.

Clive Malcolm is a partner in Horwath Clark Whitehill’s Risk & Assurance Group.

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