We’ve noticed that a number of schools have formed separate entities, specifically designed to fundraise for the school or as fiduciary bodies to manage investment funds for the benefit of the school. While the intent is to be commended, these bodies are technically considered to be under the control of the Boards of Trustees and therefore require consolidation with the schools’ annual financial statements. Hence, our comment: “You can’t have your cake and eat it.”
What is a controlled entity?
A separate legal entity that has been set up and is under the control of the school’s board of trustees.
What are the implications?
If an entity is a controlled entity of a school board of trustees then:
- its annual financial statements must be consolidated with the school financial statements
- it is required to be audited as a Crown Entity by the Auditor General
This equates to additional cost as well as including the funds in the school’s annual financial statements.
When is an entity a controlled entity?
The tests for accounting control can be different to legal control. In accounting terms the tests are a combination of control and benefit tests. i.e. who has the power to control the decision making in the organisation, and who benefits from the organisation. Under the accounting standards these tests are wide ranging and it is reasonably easy to be caught in their net.
The most common scenario is where an entity is established, often a charitable trust, to fundraise, receive, and manage donated funds for the benefit of the school. Usually members of the school board of trustees are appointed as trustees or as the governing body of the new entity. If members of the school board have the voting majority or if the school board has the ultimate power to appoint or remove trustees then that is deemed to be sufficient control for accounting purposes.
How to avoid being a controlled entity?
Essentially the school must be willing to give away legal control. This means the school board will not have control over the funds of the new entity. For many, this is a bridge too far.
What to do?
If you are thinking of establishing another entity attached to your school your Hayes Knight advisor is available to talk to you about the issues involved.