Housing Association Boards: Why External Financial Assurance Matters
As the Managing Director of DTP , I have been reflecting on the increasing importance of external financial assurance for housing associations. This concern has been sparked by observations regarding the technical delivery and governance oversight of strategic financial management at the highest levels within some organisations in our sector. One of DTP’s’ core client services, since we were established, has been to support the finance teams (and the boards) of our clients in relation to financial planning – in effect, providing ‘third party’ support and experience in all matters relating to business planning, and often treasury and funding. This support, drawn from many years of sector experience, from skilled technical advisors, either provided through a ‘retainer’ arrangement, with clients being able to ‘call off’ support at key times of the year or on an ‘ad-hoc’ basis whenever needed.
Whatever way the support is commissioned, it is clear that value is placed on the ‘third party’ assurance that our service offers.? DTP is not unique in delivering this type of service, we are aware of and have respect for, other professional service providers offering this form of assurance to the sector and from time to time, we compare our advice with that of others and consider that there is a high degree of alignment in the advice we provide to our respective clients.
Why do clients seek our support?
Clients don’t seek our support because they don’t understand these matters, or because they don’t have the skills and experience, mostly it is because they are looking for independent advice and assurance on business planning assumptions, from advisors with technical know-how and experience and exposure to a range of clients and to good (and not so good) practice in the sector.? They ask for this assurance to ensure that their own considered approach is logical and appropriate (given sector conventions and regulatory and funders’ expectations) and to avoid (without good reason) adopting practices which could leave them with imprudent forecasts in their business plan projections, or which could put the organisation at risk or be considered an ‘outlier’ by the regulator (and possibly others).? The business plan is a tool used to predict (as far as possible) future financial viability and the various potential peaks and troughs - it is a critical source of data used to inform the most significant of decisions made by the Board.? Confidence and assurance in this crucial source of data is therefore of the highest strategic importance.
Why don’t all clients look for this?
This is something that I have been concerned about and it is what drove me to write this blog.? I am sure that the answer is different from provider to provider, but what I have noticed is that a number of organisations, some small and some not that small, seem to prepare financial business plans in what I can only describe as a bit of a vacuum, clearly using skill and diligence, but it would seem without (much) recourse to reliable external sources of knowledge and experience. This can sometimes result in optimistic, rather than prudent, assumptions being deployed in business plan projections in, for example, sales income, cost growth and the future costs of borrowing.? Whilst optimism is a positive characteristic generally, in business planning this can produce misleading projections which lead to decision makers being misled into making imprudent judgements about the availability of resources and the allocation of these. ?Of equal concern are the business plans which we can see have not kept pace with change and are simply out of date in terms of the key assumptions – failing to reflect the latest economic data and operating environment.?
What are the associated risks?
As an example, DTP is sometimes asked to provide advice on a strategic project, which might require us to review the forward projections and results in a financial business plan – having never previously been invited to do so.? In doing this, we are finding that we are coming across some quite imprudent business planning assumptions, including rental uplifts, interest rates, inflation and costs and income growth – to name just a few.? The dangers are clear – especially so, in an era where the sector’s finances and operating margins are under the greatest strain and scrutiny since the 2007/08 financial crisis – according to the RSH (October 2024).? Once the matters of concern are addressed, through sensitive dialogue and revised modelling, the outlook for some of these clients can often look a little less rosy than it had been hitherto.?? It is clearly not our intention, or job, to create unnecessary concerns, or jeopardy, for housing associations, but equally we are bound by a professional duty to steer organisations away from practices which might lead a Board to make ill-informed strategic decisions, in the belief that the business’ resources are more robust than they in fact are.?
Why Boards should get external assurance on the organisation’s finances
Board should do this to:
a)????? Provide ‘third party’, support and assurance to the Chief Financial Officer (or equivalent), from a sector specialist with experience of working a wide range of businesses in the sector, of all shapes and sizes;
b)????? Secure external, independent assurance to the board and audit committee (or equivalent) on technical, financial matters that are rarely able to be effectively assessed or scrutinised, even by the most competent governing body, or specialist committee;
c)????? Provide assurance beyond existing lines of defence, such as internal and external audit, as this advice goes beyond the conventional remit of an auditor, who whilst steeped in accounting and other matters, will not normally be able to draw on the expertise of a sector specialist in financial planning, funding and some other housing sector financial specialisms;
d)????? Demonstrate tangible evidence of the board and executive’s appetite and confidence to seek external opinions on key business matters (routine or otherwise) when in dialogue with the regulator and other key stakeholders.
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If you would like to have a discussion about any of the matters that I have covered here, or if you would like to discuss the retained and ad-hoc financial planning (and other related) services that DTP provides, please contact me - [email protected].? DTP are also able to offer a full Financial Health Check which can provide much of the necessary assurance that boards require.