Financial reporting standards expert Steve Collings gets to grips with key aspects of new guidance for charity accounts.
The Charity Commission for England and Wales has issued guidance in the form of Independent examination of charity accounts: Directions and guidance for examiners (CC32) which applies mandatorily for independent examiner’s reports signed by the examiner and dated on or after 1 December 2017.
This article will cover some of the key aspects of CC32, which includes three additional directions, covered below.
Charity law sets out the reporting, filing and external scrutiny obligations which trustees are required to follow. Charity law also states that a charity with a gross income exceeding £25,000 is required to have some form of external scrutiny of their accounts and the trustees may decide an independent examination is appropriate (provided that an audit is not required by charity law or any other reason).
CC32 December 2017 contains three new directions concerning conflicts of interest, related parties and the charity’s financial circumstances as follows:
- Direction 2: Check for any conflict of interest that prevents the examiner from carrying out their independent examination.
- Direction 7: If the accounts are prepared on an accruals basis and one, or more, related party transactions have taken place, the examiner must check if these were properly disclosed in the accounts.
- Direction 9: The examiner must check whether the trustees have considered the financial circumstances of the charity at the end of the reporting period and, if the accounts are prepared on an accruals basis, check whether the trustees have made an assessment of the charity’s position as a going concern when approving the charity’s financial statements.
Guidance supporting the regulations
CC32 incorporates terminology such as ‘must’, ‘should’, ‘recommend’ and ‘may’, which in these circumstances have the following definitions attached:
- The word ‘must’ in the guidance means that something is a legal or regulatory requirement or duty which the independent examiner must comply with or follow when carrying out their independent examination.
- ‘Should’ means that guidance is best practice which the Charity Commission expects the independent examiner to consider when undertaking their examination.
- ‘Recommend’ and ‘may’ are used where the Charity Commission believes that the independent examiner will find useful when carrying out their work. The independent examiner will have to exercise their own judgement where a recommendation or practice is concerned.
It is important to emphasise that if the independent examiner has not followed the new directions and guidance from 1 December 2017, the Charity Commission states that the examiner will not have carried out their independent examination properly so it is important that independent examiners fully understand the guidance in CC32 December 2017.
Audit or independent examination?
A charity is required to have an audit for financial years ending on or after 31 March 2015 if either its gross income exceeds £1m, or its gross income exceeds £250,000 and the gross assets (not net assets) exceeds £3.26m.
An audit may also be required by virtue of the governing document or other reason so the examiner needs to check other information where the charity’s gross income and gross assets are below the above thresholds because an audit may be required due to other reasons.
If the gross income for the year is £25,000 or less, an independent examination is not required, but the trustees may decide to have one if they wish.
Who can carry out the independent examination?
An independent examination can be carried out by any person that is independent, has the necessary knowledge and experience and provided that the gross income of the charity is £250,000 or less. The independent examiner will need to understand what accounts are, what they are intended to do and possess some analytical skills.
In order for an examiner to be independent, they must have no connection with the charity’s trustees which may impact on impartiality. This does not mean that the examiner cannot be a member or supporter of the charity, but they should not be a material donor.
CC32 states that the term ‘independence’ means that the examiner is not influenced, or perceived to be influenced, by either close personal relationships with the trustees or by a day-to-day involvement in the administration of the charity being examined. Whether a connection with the charity amounts to a close personal relationship with the trustees which will have an impact on independence must be judged in light of the particular circumstances.
Examiners cannot independently review their own work; hence this will preclude the charity’s bookkeeper from being the examiner. In practice, many charities appoint the services of a professional accountancy firm to carry out the independent examination and the person carrying out the examination must have a sound awareness of the requirements of CC32.
Relevant professional bodies
Once a charity’s gross income exceeds £250,000, the examiner has to be a person who is a member of one of the following bodies. The examiner must also ensure that they comply with their relevant professional body’s rules when undertaking the role of the examiner. The listed bodies are:
- Institute of Chartered Accountants in England and Wales
- Institute of Chartered Accountants in Scotland
- Institute of Chartered Accountants in Ireland
- Association of Chartered Certified Accountants
- Association of Authorised Public Accountants
- Association of Accounting Technicians
- Association of International Accountants
- Chartered Institute of Management Accountants
- Institute of Chartered Secretaries and Administrators
- Chartered Institute of Public Finance and Accountancy
- Fellow of the Association of Charity Independent Examiners
- Institute of Financial Accountants
- Certified Public Accountants Association
Schedule of directions
The revised directions contained in CC32 are as follows:
|Direction||Direction heading (first line only)||Applicable to receipts and payments||Applicable to accruals accounts|
|1||Check whether the charity is eligible to have an independent examination||√||√|
|2||Check for any conflict of interest that prevents the examiner from carrying out their independent examination||√||√|
|3||Record your independent examination||√||√|
|4||Plan the independent examination||√||√|
|5||Check that accounting records are kept to the required standard||√||√|
|6||Check that the accounts are consistent with the accounting records||√||√|
|7||If the accounts are prepared on an accruals basis and one or more related party transactions took place the examiner must check if these were properly disclosed in the notes to the accounts||-||√|
|8||Check the reasonableness of the significant estimates and judgments and accounting policies used in accounting for the types of fund held and in the preparation of the accounts||Part||√|
|9||The examiner must check whether the trustees have considered the financial circumstances of the charity at the end of the reporting period and, if the accounts are prepared on an accruals basis, check whether the trustees have made an assessment of the charity’s position as a going concern when approving the accounts||Part||√|
|10||Check the form and content of the accounts||√||√|
|11||Identify items from the analytical review of the accounts that need to be followed up for further explanation or evidence||√||√|
|12||Compare the trustees’ annual report with the accounts||√||√|
|13||Write and sign the independent examination report||√||√|
|-||Statutory duty to report matters of material significance to the Commission||√||√|
|-||Examiner’s discretion to report relevant matters to the Commission||√||√|
Appendix 4 in CC32 contains 12 illustrative examiner’s reports. There are two kinds of examiner’s report: one for non-company charities and another for charitable companies.
Most charities are non-company charities, but where a charity is set up under the Companies Act, these are regarded as charitable companies. The wording of an unqualified report for a non-company charity preparing accruals accounts, with a gross income of £250,000 or less is as follows:
|Independent examiner’s report to the trustees of [XYZ Charity]
I report to the trustees on my examination of the accounts of [XYZ Charity] (the Charity) for the year ended 31 December 2017.
Responsibilities and basis of report
As the charity trustees of the Charity, you are responsible for the preparation of the accounts in accordance with the requirements of the Charities Act 2011 (‘the Act’).
I report in respect of my examination of the Charity’s accounts carried out under section 145 of the 2011 Act and in carrying out my examination I have followed all the applicable directions given by the Charity Commission under section 145(5)(b) of the Act.
Independent examiner’s statement
I have completed by examination. I confirm that no material matters have come to my attention in connection with the examination giving me cause to believe that in any material respect:
1) accounting records were not kept in respect of the Charity as required by section 130 of the Act; or
2) the accounts do not accord with those records; or
3) the accounts do not comply with the applicable requirements concerning the form and content of accounts set out in the Charities (Accounts and Reports) Regulations 2008 other than any requirement that the accounts give a true and fair view which is not a matter considered as part of an independent examination.
I have no concerns and have come across no other matters in connection with the examination to which attention should be drawn in this report in order to enable a proper understanding of the accounts to be reached.
Relevant professional qualification or membership of professional bodies (if any):
About Steven Collings
Steve Collings, FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd where Steve trained and qualified.