Arts Council is pulled up by the National Audit Office for blurring the boundaries between Lottery funds and Grant-in-Aid

Attempts by Arts Council England (ACE) to re-purpose £4.2m of efficiency savings and a £5m under-spend on its emergency budget for bailing out “organisations in financial distress” have fallen foul of the National Audit Office (NAO). ACE is required by law to account separately for the funds it receives directly from Government and from the National Lottery Distribution Fund, and Government Grant-in-Aid funds cannot be paid over to supplement the Lottery balance. But between January and March 2011, ACE diverted £9.2m of Grant-in-Aid funding to meet 38 Lottery grant instalments to 34 organisations, though none of the 34 were made aware of the change until this week, in response to AP’s investigation.

If ACE fails to use its Grant-in-Aid funds in the year to which they relate, they must be returned to the Exchequer unless approval is granted for the balance to be carried forward. Rather than spend the cash or risk the Treasury clawing it back, ACE used the funds for its Lottery-funded ‘Sustain’ and capital projects: there are no restrictions on carrying forward Lottery funds so ACE has greater flexibility in the timing of their use. But as a consequence of these tactics, Comptroller and Auditor General Amyas Morse has ‘qualified’ his audit opinion on ACE’s financial statements, meaning that he disagrees with the treatment or disclosure of information in them.

Morse said: “where grants have previously been accounted for as commitments of the Lottery and reported as such to Parliament, continuing grant payments should, except in exceptional circumstances, have been charged to the Lottery and not Grant-in-Aid…”. He went on to explain that it was only the lack of clarity in the guidance provided by the DCMS and the Treasury that persuaded him not to also qualify his opinion on the ‘regularity’ of ACE’s accounts – a second type of judgement which certifies that financial statements are “free from material misstatement”. Only 6 of the 470 public bodies for which the NAO performed an audit function in 2010/11 were given a qualified opinion on their financial statements, and no Lottery distributing body has ever before been pulled up for blurring the boundaries between Treasury money and Lottery funding.

Having investigated the NAO’s findings, the DCMS concluded that ACE’s treatment of the payments was not “inherently novel and contentious”, and therefore did not require prior approval. However, due to the size and nature of the payments, it would have expected ACE to draw the matter to its attention earlier. ACE has admitted that its processes were “not as robust as they could have been” and will in future seek approval from the DCMS for such accounting processes. It has also confirmed that the process for de-committing Lottery grants will from now on be “fully transparent and consistent, both with grant recipients and within the Arts Council’s grant systems and accounting records”.

The NAO’s investigation into ACE’s financial reporting has had a spin-off on the submission of its accounts to the Charity Commission. The Arts Council, which is the second biggest charity in the UK, was 98 days late in submitting its accounts which were finally signed off on 20 April.