It’s only large charities that need an audit – isn’t it?

At Scrutton Bland we specialise in audits for the not-for-profit sector, particularly charities. Tim O’Connor, Corporate Services Partner, discusses the need for charities to have audited financial statements and the benefits that brings, particularly in a time of economic uncertainty and the collapses of some businesses due to accounting irregularities.

For some charities an audit can be seen as an unnecessary compliance cost, diverting valuable time and resources away from the charity’s core activities and purpose. However, the benefits of an audit are far more extensive than achieving a legal requirement. An audit can provide stakeholders and Trustees with the comfort that they are compliant with the necessary Charities Commission requirements as well as providing them with credibility to donors and stakeholders that their funds are being appropriately managed.

Basic principles

Charities are regulated by the Charities Commission which requires that all charities must maintain accounting records and prepare accounts. These must be made available to the public on request. Registered charities must also prepare a Trustees’ Annual Report incorporating their financial statements, which will vary in terms of content, dependent upon the size and constitution of the charity. The Trustees’ report is a method for the charity to explain to the users of its financial statements the charity’s purpose and how its activities have helped to achieve that in the previous year. This can be seen to be a method of promoting the charity, however the report should be balanced.

Does my charity need to be audited?

In most cases charities are governed by the Charities Act, and for incorporated charities, also the Companies Act. However the threshold for charities to be legally required to prepare and file audited financial statements is much lower than those of private and public companies.

The law now states that charities with an income of £1 million and over are legally required to be audited. An audit will also be needed if total assets (before liabilities) exceed £3.26m, and the charity’s gross income is more than £250,000 per annum. Audits may also be undertaken if it is required by the charity’s governing document or due to a condition imposed by a funder.

Charities with a gross income in excess of £25,000 are required to have an independent examination of their financial statements, which requires a lower level or inspection, but provides stakeholders with the reassurance that their financial affairs are in order at a basic level. However a charity can voluntarily request an audit and there is a strong argument for charities voluntarily submitting their accounts for inspection by an auditor.

So why have an audit?

The benefits of having an audit are split into 3 areas:

Assurance – If you are a Trustee or a stakeholder of a charity, then an external audit of your financial statements can give you much greater confidence that the financial position is appropriately presented. You will be able to demonstrate that your accounts are being properly managed and that your accounting systems are producing reliable financial information. This information can then be used as a clear basis to make future decisions. Furthermore, whilst an audit cannot guarantee that fraud is not taking place, it is an important tool in the prevention of fraud. The audit process will assist Trustees and management in highlighting where processes can be improved to reduce the risk of fraud and identify risk areas. A common issue for smaller charities is either the lack of segregation of duties or the lack of in-house financial expertise.

Reputation and credibility – An audited set of financial statements can be an important piece of information in presenting your charity’s credibility to future donors. If the donor can see that donations are being managed and spent appropriately then they are far more likely to support the charity. Typically, donors will provide funds with certain restrictions and will gain comfort that the expenditure incurred is appropriately offset. Furthermore your lenders will typically request audited financial statements as a prerequisite for a loan agreement.

Control and process improvement – Whilst an audit is typically focused on the numbers in the financial statements, the insight that an independent auditor is able to provide to your charity’s processes is extremely valuable and will highlight areas of your financial processes that may need attention or tightening up. A good auditor will work with you to suggest improvements to your charity’s administrative systems which could save your charity time and resources. They may also have suggestions for methods that can assist in reduce the charity’s tax and VAT liabilities. At Scrutton Bland our experience in auditing a range of charities means that we are able to benchmark your charity against other similar organisations, to help you understand how you are performing and to suggest areas that can be improved.

How do I choose an auditor?

Working with an independent auditor who understands the charity sector is a great place to start. They will know the kind of issues that you face and will be able to work with you and your teams to offer practical solutions and useful assistance. At Scrutton Bland we offer a range of services for the charity sector including audit, accounts, taxation and insurance and we have experienced and friendly specialists in each area who understand how important it is to help you to manage and mitigate the risks you face.