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Housing Association Guide Part 1 - Appendix 12 Annex A-C

Annex A

Financial Reporting

Enforcement of Article 19

1.00Enforcement of Article 19 of the Housing (NI) Order 1992

1.01Accounts and audit – Article 19 of the Housing (NI) Order 1992 states that the DSD may by order lay down accounting requirements for Associations with a view to ensuring that the accounts of every Association are prepared in the requisite form and give a true and fair view of the state of affairs of the association, so far as its housing activities are concerned.

1.02The accounts - of every Association must comply with those requirements and this must be confirmed in an auditor's report which every Association must furnish to the DSD within 6 months of the end of the period to which they relate.

1.03Under Article 20 of the Housing (NI) Order 1992:

1. All persons who are directly concerned with the conduct and management of the affairs of a registered housing association and are in that capacity responsible for the preparation and audit of accounts shall have the duty to ensure that Article 19 is complied with by the association.

2. If:

(a) The accounts of a registered housing association, as furnished to the Department under Article 19(3), do not comply with the accounting requirements laid down under paragraph (1) of that Article; or
(b) Article 19(3) is not complied with in respect of the accounts and auditor's report; or
(c) Article 37(9) is not complied with;

the association as well as each of the persons on whom the above duty is imposed shall be guilty of an offence and liable on summary conviction to a fine not exceeding level 3 on the standard scale.

3. It is a defence:

(a) For a person charged under paragraph (2) to prove that he did everything that could reasonably have been expected of him by way of discharging the duty imposed by paragraph (1); and
(b) For an association charged under paragraph (2) to prove that the persons mentioned in paragraph (1) did everything that could reasonably have been expected of them by way of discharging the duty imposed by paragraph (1) in relation to the association.

4. No proceedings for an offence under this Article shall be instituted except by or with the consent of the Director of Public Prosecutions for Northern Ireland or the Department.

2.00Reports to Management on Systems Weaknesses and Internal Control Evaluation

2.01Associations - will be aware that under the provisions of Section 43 of the Industrial and Provident Societies Act (NI) 1969 (c 24) that auditors of associations are required to make a report on the accounts examined by them and on the revenue account or accounts and the balance sheet for the year of account concerned.

2.02Section 43(4) of the Act - also requires auditors in preparing this report to carry out such investigations as will enable them to form an opinion on whether:

An association has kept proper books of account in accordance with Section 35(1)(a) of the Act;
An association has maintained a satisfactory system of control over its transactions in accordance with Section 35(1)(b) of the Act; and
The revenue account or accounts and the balance sheet are in agreement with the associations' books of accounts.

This section also requires that in the event of an associations’ failure to comply with Section 35(1)(a) or (b) or if the revenue account or accounts and the balance sheet are not in agreement with the associations' books of accounts, the auditors shall state that fact in their report.

2.03The general method of informing associations - of the results of an auditor’s investigation is by a ‘Management Letter’. This letter will include reports on:

Systems weaknesses which have come to the notice of the auditors during the course of an examination and which may affect the reliability of the accounting records and;
The results of the auditor’s evaluation of the operation of the associations' systems of internal control.

Annex B

The Revised Statement of Recommended Practice (SORP) Accounting by Registered Housing Associations

1.01Scope - The SORP applies to all UK registered housing associations except for Co ownership societies. A 'Co ownership' society (not to be confused with the Northern Ireland Co ownership Housing Association) is defined in the SORP.

1.02Implementation - The Department required all housing associations registered with it to apply the accounting requirements set out in the SORP to the audited accounts for the year ending on or after 23 March 2000 and thereafter.

The adoption of the SORP provides detailed recommended practice for all registered social landlords on the main accounting policy issues and promotes consistent practice within the sector.

1.03Associations should note - that the 2005 SORP Update 5(b) reflects changes in financial reporting standards and other accounting practice as well as developments in the social housing sector since the 2002 SORP Update was published. Where income from Supporting People is material, the total income received from Supporting People charges should be disclosed. Guidance, which does not form part of this SORP, on Supporting People income and expenditure disclosures can be found in the publication ‘Accounting for Supporting People’ jointly sponsored by the National Housing Federation and the Housing Corporation in February 2003. The 2005 version applies to all accounting periods beginning on or after 1 January 2005.

1.04Obtaining copies of the SORP - Copies can be obtained by writing to the Publications Department of the National Housing Federation, Lion Court, 25 Procter Street, London, WC1V 6NY; by contacting Publications Direct by phone (020 7067 1010); by email at info@housing.org.uk; or by contacting the NHF website at www.housing.org.uk

1.05The Department requires an Association - to submit a copy of its ‘Management Letter’ from its auditors in addition to the audited accounts for the particular accounting year in question.

Annex C

Treasury Management

1.01Written policies - Each Association should adopt comprehensive written policies, which are appropriate to the nature and extent of the treasury activities undertaken. All Associations will need to review their financial procedures and to critically review and upgrade their policies and procedures on a regular basis. Associations should consult the CIPFA Code of Practice for Treasury Management when drawing up policy documentation, Each Association must take its own decisions as to what written policies, are required in the drawing up of such policy documentation. It is the responsibility of an Association's Board to ensure that the key treasury risks facing the Association are identified and defined and their significance assessed. It is also their responsibility to ensure that there is adequate awareness and understanding of these risks at both board and officer level, and that independent professional advice is readily available, where appropriate.

1.02Treasury management policies - In addition, the Board must formulate and ensure implementation of both the treasury management policies and the treasury management procedures and controls relevant to their association's needs. Where a Board does not have access internally to investment expertise it should 'buy in' this service. In these circumstances associations will be expected to test the market to ensure that value for money is obtained.

1.03Financial management - is a key Performance Standard. This includes treasury management, policies, procedures and controls as referred to above. Associations should note that the Department may at any time look at the treasury management function in terms of the setting and operating of policies, procedures and controls.

1.04Formulation and implementation of treasury management policy - The board is responsible for ensuring the formulation and implementation of treasury management policy and treasury management procedures and controls appropriate to their operational needs and in accordance with legislation, relevant regulations and best professional practice.

1.05Associations - will need to identify which elements of treasury management apply to their operations and from that determine the policies, procedures and control structures that are required. RHAs are strongly advised to consult the CIPFA Code of Practice for Treasury Management in Public Services and its accompanying Guidance Notes. Although smaller Associations may have limited treasury activities and few specialist staff resources nevertheless, the principles that the Code espouses are universally relevant to associations of all types and sizes.

1.06Treasury management risks - Some of the key treasury management risks are:

Interest rate - uncertainty of future cash flows that are dependent on, or sensitive to, movements in interest rates or the change in valuation of interest rate sensitive assets and liabilities;
Inflation - uncertainty of future cash flows that are sensitive to inflationary or deflationary conditions;
Liquidity - insufficient cash holdings or easily realisable short-term investments to meet financial obligations as they fall due;
Counterparty exposure - inability of an organisation, with which the Association has contractual relationships, to meet its obligations to the Association when they fall due;
Fraud or error - potential for the fraudulent misappropriation of funds or the loss of funds through human error;
Basis or timing mismatch - assets and liabilities which are sensitive to external influences e.g. inflation, will re-price or re-value in different time periods or on differing bases which could adversely affect the relationship between investment income and debt charges in the short term;
Lenders' covenants - inability to satisfy lenders' covenants in respect of, for example, interest cover ratio or capital gearing triggering cross default covenants in other loan agreements;
Management - failure of the board and senior executives to fully understand the implications of transactions that they are endorsing or which will be made under authority delegated by them to members of staff;
Systems - failure of internal systems or procedures to effectively control transactions and the cash flows which are generated by them, or to accurately record and report them;
Banking system - failure of the banking system to process transactions correctly or in a timely manner OR the failure of the Association’s clearing bank and the resultant loss of monies lodged temporarily in the Association’s bank accounts;
Political risk - a change in Government or regulatory policy affecting, for example, the tax position, revenue generation potential or grant support regime of Associations; and
Foreign exchange - where funds are raised in any currency other than Sterling the Association would be exposed to movements in the foreign exchange rate between the currency of the loan and Sterling.

[Note: This is not an exhaustive list. Each Association may also have unique risks.]

1.07The Department’s Regulatory Framework - sets out our requirements in respect of finance and viability. A treasury policy statement is an essential part of a suite of financial policies. The treasury policy statement should be approved and formally adopted by the board as part of the Association’s rules, standing orders or financial regulations. The policy statement should be critically reviewed by on a regular basis and formally considered on an annual basis.

1.08Principles of Treasury Management - There are four universal principles of treasury management that should be the drivers of policy and central to the policy statement:

Compliance with statute, regulation and best practice;
Security of financial assets;
Provision of adequate liquidity to meet financial obligations; and
Effectiveness and efficiency in the use of financial resources.

The combination of these principles should be heavily weighted towards the minimisation of risk, the preservation of asset value and liquidity levels and the minimisation of costs within those parameters. The maximisation of returns should be of secondary importance.

1.09Treasury policy statement - The approved policy should comply with the provisions of this guide. The treasury policy statement should include:

A definition of the approved activities of the treasury function;
The process for the formulation of treasury management strategy, including interest rate management strategy;
Approved methods of raising capital finance e.g. bank debt or bond issue;
Approved sources of finance e.g. banks, building societies etc;
A list of approved counterparties to whom surplus cash may be lent or specific criteria for their selection and the limits of exposure to each;
A list of approved financial counterparties or explicit criteria for their selection and the limits of exposure to each;
A definition of the types of financial instrument to be used and the extent of their use, including those to be used for interest rate exposure management;
Policy on the use of external intermediaries such as brokers and fund managers;
Policy on the internal delegation of authority with explicit lists identifying officers or posts;
Policy on liquidity specifying minimum working capital, cash contingency requirements and control of debtors and creditors;
Policy on debt maturity profile and re-financing risk management;
Requirements for review and reporting of the policy and the treasury operations that it controls; and
Policy on the use of the banking system and periodic competitive tendering for the provision of banking services.

1.10When determining interest rate exposure - Associations should consider which assets and liabilities are sensitive to interest rate movements and the significance of that sensitivity. The policy should address such matters as the mix of fixed and floating (or index linked) interest rate assets and liabilities:

The maturity profile of the debt and investment portfolios;
The possible, probable and most likely future interest rate scenarios and their effects on future cash flows; and
The level of financial exposure that the Association is willing to accept and the ability to respond to changes in the interest rate environment. Policy on the management of interest rate exposure should be reviewed regularly to ensure that it remains appropriate and effective in current circumstances.

1.11The Treasury management procedures and controls - should implement and ensure continued compliance with policy. Associations should develop and adhere to effective procedures and controls. Treasury procedures should be detailed, specific and in writing. It is good practice to produce a procedures manual as a reference document. The procedures manual should be reviewed regularly and amended as frequently as is necessary to ensure that controls are effective and current.

1.12Key operating procedural controls include:

Separation of duties such that no one individual can initiate, confirm, record and settle a transaction;
Specific and unambiguous delegation of authority;
Diversification of exposure;
Adherence to rigorous credit quality criteria in the selection of counterparties;
Authorisation of transactions by a senior person to whom authority has been delegated by the governing body and who has not been involved in arranging the transaction;
Full documentation of all transactions to provide a transparent audit trail;
Regular and timely reporting of treasury activities to the executive and members; and
Detailed job descriptions that include specific authority limits, accountability and responsibilities.

[Note: This is not an exhaustive list and it must not be regarded as a checklist.]

1.13Reporting Structure - Associations should develop a reporting structure that ensures that senior officers and members are kept fully informed of treasury activities. The nature and frequency of the reports produced will vary according to the level and scope of treasury activities undertaken but must facilitate fully informed and timely decision making by those responsible for policy and operational matters:

Board’s of Associations with active treasury operations should receive a report of significant transactions undertaken at each meeting, ideally at least quarterly;
A formal statement of treasury activities should be prepared annually providing an overview of the past year's activity and performance against expectations and targets. It should also set out a short-term plan for the forthcoming year and a medium to longer-term plan for three to five years forward. Significant longer-term issues such as refinancing requirements and the need to maintain sinking funds should also be included; and
Associations with no external debt and which are not developing should maintain and regularly review a cash flow forecast for at least the forthcoming twelve months. A report of the cash flow forecast position and the policy for the investment of working capital surpluses and cash backed reserves should be presented to the board annually.

1.14Review of systems - In addition to regular internal audit compliance checks, Associations should periodically conduct a thorough review of their treasury systems and risk identification and management policies and procedures. This may best be achieved through the use of an independent adviser or the external auditor, as a periodic additional audit task. However, if there are appropriately skilled individuals in the internal audit function they may also be tasked with periodic system reviews. In intervening years the external auditor should test compliance against policy, procedures and control systems.

1.15Credit policy - Associations should formulate and adhere to a rigorous and prudent credit policy in the selection of their financial counterparties. This policy should encompass the providers of private finance, those institutions with which surplus funds are invested and the providers of banking, hedging, leasing and other financial services. Associations should be highly risk averse. Credit policy should ensure that counterparty credit risk (the risk that a financial counterparty will be unable to fulfill its obligations as they fall due) is reduced to the lowest level practicable without impeding the ability to fulfill necessary financial operations. In practice this will mean adopting a policy that sets out specific credit quality parameters by which counterparties will be selected. Those parameters should be pragmatic and draw on the best available market intelligence. In most instances this will mean using established credit rating agencies and setting minimum acceptable ratings for counterparties. The Department will, include the examination of Association’s treasury functions into the inspection processes.