OG15 C1 Charity accounts and reports: Dealing with poor practice by independent examiners & auditors in external scrutiny of accounts

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Policy Statement/Overview

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Summary of the guidance

Casework Guidance

Please read the IMPORTANT NOTE on the front page

OG15 C1

OG15 C1 Dealing with instances of poor practice by independent examiners and auditors in their external scrutiny of accounts - 14 March 2012 

1. Our regulatory interest in the standards of external scrutiny

The Charities Act s.14 provides for the Commission to have 5 objectives. Of these objectives, the quality of charity accounts and their external scrutiny has a bearing on:

  • The public confidence objective which provides that the Commission is to increase public trust and confidence in charities. Donors, the public, public authorities and other parties rely on the assurance that external scrutiny provides that the accounts are prepared in accordance with legal requirement and provide a “true and fair view” of a charity’s financial activities and financial position and, where accruals accounts are prepared, that the accounts are consistent with the trustees’ annual report and the directors’ report prepared by company charities. It gives assurance that accounting records are kept and that the auditors have been given necessary information and explanations for their audit.
  • The compliance objective is about promoting trustees’ compliance with their legal obligations. The external scrutiny provides assurance that the accounts meet legal requirements.
  • The accountability objective is about enhancing the accountability of charities to donors, beneficiaries and the general public. Accountability is promoted by accounts and annual reports which include relevant information and the required legal and stewardship disclosures and are appropriately formatted and prepared to relevant standard. The external scrutiny provides an opportunity to identify, subject to the level of assurance provided, that the accounts are complete and fairly presented and that the accounts are consistent with the information given in the annual report.

 

The Commission looks upon auditors and examiners as providing a valuable role in encouraging best practice, compliance with the SORP for accruals based accounts, and for valuable intelligence provided through their whistle-blowing duties. The reports of the auditor and examiner on the accounts are valuable in identifying material issues or material departures from the requirements of law and standards, including non-compliance with the SORP and can highlight more significant issues such as the failure to keep accounting records through to errors or disclosures that might mislead the reader of the accounts.

 

The Commission and the Office of the Scottish Charity Regulator (OSCR) are the joint SORP making body for charities in the UK. One of the Accounting Standards Board’s requirements for SORP making status is that OSCR and the Commission share its aim of advancing and maintaining standards of financial reporting in the public interest.

 

Consequently poor practice has a bearing on the work of the Commission and public confidence in the reporting and accounting framework for charities. The Commission has a regulatory interest in the quality of the work undertaken by auditors and examiners and where incidences of poor practice are identified, there is a need to consider whether that poor practice has a bearing on the achievement of our statutory objectives or regulatory functions.

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2. What is meant by the term poor practice?

The issue here is not the activities of the charity or the quality of the trustees’ annual report, both of which are the legal responsibility of the trustees. Poor practice concerns the work of the auditor or examiner in carrying out their external scrutiny.

 

The trustees’ annual report is a document prepared by, and signed by, the trustees and its content should be consistent with the Charities (Accounts and Reports) Regulations 2008 and the recommendations of the Charities SORP. Our publication CC15b Charity reporting and accounting: the essentials, includes an appendix setting out the required contents for larger charities (over the statutory audit threshold) and smaller charities (below the statutory audit threshold).

 

Although the examiner or auditor can add value by advising the trustees as to how to improve their reporting, the contents of the annual report are the responsibility of the trustees. When reviewing the adequacy of the trustees’ annual report in relation to the requirements set out in the Regulations, the auditor (or for accruals accounts only the examiner) must report any material inconsistency between the accounts and the annual report.

 

accountant_referconsultIf there is material inconsistency and the auditor (or for accruals accounts the examiner) has not reported it, then accountancy advice should be taken if the inconsistency has been or is related to an external complaint or is of regulatory interest.

 

The poor practice by the auditor or examiner relates to their responsibility in signing off their report on the accounts, without adverse comment, where the standard of those accounts falls below legal requirements in a significant way. This involves an element of professional judgement. For example are the accounts misleading or, where accruals accounts are prepared, is there any material inconsistency between the trustees’ annual report and the accounts signed off?

 

accountant_referconsultSince the assessment of poor practice involves professional judgement, any suspected incidence of poor practice shall always be referred to an accountant for review.

 

The matters the Commission’s accountant will be considering when assessing whether an instance of poor practice has arisen are:

  • Knowledge of and compliance with the Directions for independent examination or relevant auditing standards and guidance issued by Auditing Practices Board.
  • Whether a matter of material significance to our regulatory function has not been reported where the auditor or examiner was aware of that matter.
  • Whether the correct form of audit report has been provided that is compliant with the Charities Act, the Charities (Accounts and Reports) Regulations 2008, the Directions for independent examination, or the Companies Act 2006, as appropriate.
  • The materiality of any error or misstatement discovered within the accounts.
  • The degree and significance of any SORP non-compliance where accruals accounts are prepared.
  • The extent to which the work of the auditor or examiner and impeded the conduct of a statutory inquiry opened under s.46 of the Charities Act.
  • Any other material matter which, in the opinion of a Commission accountant, may suggest an incidence of poor practice.

 

The Commission is not a body charged with the supervision or regulation of the audit profession however that does not prevent the Commission having legitimate concerns as to the quality of an external scrutiny or from providing information about such concerns (under s.56 of the Charities Act) to an audit supervisory body or accountancy body charged with the regulation of the practicing standards of their professional membership. .

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lawyer_refer3. The responsibilities of trustees related to the preparation and external scrutiny of accounts

 

The Charities Act requires the trustees:

  • To keep accounting records, s.130;
  • To prepare accounts in the appropriate format in accordance with ss.132-133 and the Charities (Accounts and Reports) Regulations2008 , and;
  • To arrange for the auditor or independent examination to take place, and ensure that person is qualified to conduct the scrutiny, s.144(2); and
  • Where the charity is registered to prepare, or if excepted from registration to provide on request, a trustees’ annual report, ss.162, 166 and 168.

 

Charities incorporated under the Companies Act 2006 have the similar responsibilities as non-company charities above except that they are required:

  • To keep accounting records, section 386;
  • To prepare accounts in the appropriate format, section 394 (and 399)
  • To arrange for an audit (except where the company qualifies as small in which case the requirement for scrutiny is now that required by the Charities Act) and ensure that person is qualified to conduct the scrutiny, sections 475 and 485; and
  • To prepare a Director’s report, section 415.

 

It is the responsibility of the trustees to prepare the accounts and engage the services of the examiner or auditor. However where the examiner or auditor prepares the financial statements from the trial balance, the practitioner has a responsibility for the quality of those accounts in addition to the quality of their scrutiny work.

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4. Poor practice and the work of a professional examiner

lawyer_referA “professional examiner”, for the purposes of this guidance, is a person who is a member of one of the 11 bodies listed in s.145(3)-(4) of the Charities Act, the members of which may undertake independent examinations of charities with a gross income exceeding £250,000 or someone charging a fee for their examination services.

 

We can reasonably expect the professional examiner to:

  • be independent of the charity and its trustees and to act within their professional body’s ethical code of practice;
  • have appropriate technical knowledge and skill necessary for the conduct of their examination (requisite skills and practical experience to carry out a competent examination);
  • have read and have reasonable knowledge of our guidance to Independent Examiners;
  • have followed the 10 Direction to examiners when undertaking their examination;
  • make a report to the trustees following their examination of the accounts meeting the requirements of Regulation 31 of the Charities (Accounts and Reports) Regulations 2008;
  • report to us any matter where there is reasonable cause to believe it is likely to be of material significant to our regulatory functions;
  • have a working knowledge of Money Laundering Regulations and to be aware of the risks and indicators of money laundering or terrorism.

 

In addition, where the accounts examined have been prepared on the accrual basis to:

  • have reasonable knowledge of accounting principles including the Charities SORP;
  • have reasonable knowledge of the form and content requirements for charity accounts as set out in Regulation 8 of the Charities (Accounts and Reports) Regulations 2008; and

 

Where the accounts examined are for a company charity to:

  • have reasonable knowledge of the requirements of section 396 of the Companies Act 2006

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5. Poor practice and the work of volunteer examiners

A “volunteer examiner”, for the purposes of this guidance is a person who is not a member of one of the 11 bodies listed in s.145(3)-(4) of the Charities Act or someone who is not a member of a listed body and does not charge a fee for examining the accounts.

 

A volunteer examiner who is not a member of a body listed in s.145(3)-(4) can only undertake an examination for a charity with an income below £250,000. A member of one of these 11 bodies acting as an unpaid volunteer examiner should be treated as a professional examiner.

 

We can reasonably expect the volunteer examiner to:

  • be independent of the charity and its trustees and to act with honesty and integrity;
  • to only accept appointment requisite skills and practical experience to carry out a competent examination;
  • have read our guidance to Independent Examiners;
  • have followed the 10 Direction to examiners when undertaking their examination;
  • make a report to the trustees following their examination of the accounts following our Guidance and Directions to examiners;
  • report to us any matter where there is reasonable cause to believe it is likely to be of material significant to our regulatory functions as explained in our Guidance and Directions to examiners;

 

In addition, where the accounts examined have been prepared on the accrual basis to:

  • have reasonable knowledge of the Charities SORP;

 

Where the accounts examined are for a company charity to:

  • be conversant of the requirements of section 396 of the Companies Act 2006

 

We do not expect volunteer examiners to have the same sense of professional scepticism or detailed understanding of accounting principles and the SORP as their professional counterparts.

 

Volunteer examiners are not subject to supervision by any regulatory or professional body and where their work falls below the standard expected it is recommended that they are signposted to appropriate advice and guidance particular our Independent Examination Guidance and Directions and relevant accounting packs.

 

If the Commission accountant advising is concerned that the charity is put at significant risk by the standard of the examination or that the report provided is potentially significantly misleading consideration should be given to advising the charity trustees directly of the problems identified (refer to section 9) but at no time should any overt criticism of the examiner be made; it is up to the trustees to make their own assessment having given due consideration to the issues raised.

 

accountant_referlawyer_referconsultThe matters identified should be consider by a Principal Accountant who should take legal advice where appropriate prior to such matters being referred to the trustees in correspondence.

 

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6. Poor practice and the work of auditors

The legislation covering who is eligible to be appointed as a statutory auditor is contained in Charities Act s.144(2) and is limited to those eligible to act as an auditor under company law. The supervisory bodies whose members may be eligible are:

  • The Institute of Chartered Accountants in England and Wales;
  • The Institute of Chartered Accountants of Scotland;
  • The Institute of Chartered Accountants in Ireland;
  • The Association of Chartered Certified Accountants; and
  • The Association of Authorised Public Accountants.

 

In addition the Charities Act permits the Comptroller and Auditor General (NAO), Auditor General for Wales (WAO) or the Audit Commission to act as auditor in relation to particular categories of charities. We can expect auditors to operate to high standards of professionalism, and to be fully conversant with their legal and professional responsibilities.

 

We can reasonably expect the auditor to:

  • be independent and fully compliant with the APB ethical code applicable to their work and the size of the charity audited;
  • have sound knowledge of accounting principles and standards appropriate to the audit assignment;
  • have sound knowledge of the Charities SORP or other SORPs relevant to the audit assignment;
  • have sound knowledge of International Auditing Standards (UK and Ireland) and to apply them as relevant to the audit assignment;
  • be conversant with relevant guidance issued by the APB through Practice Notes in particular Practice Note 11 and Practice Note 12;
  • have sound knowledge of the charity accounting and reporting framework, in particular, the Charities (Accounts and Reports) Regulations 2008;
  • understand their statutory duty to report to us matters of material significance to our regulatory functions and right to report other relevant matters;
  • to exercise that duty to report matters of matter significant in line with the law and auditing standards and guidance issued by APB;
  • to understand their legal duties under Money Laundering Regulations and understand the risks and indicators of money laundering or terrorism.

 

Where the accounts audited are for a company charity to:

  • have sound knowledge of the requirements of section 396 of the Companies Act 2006 and regulations made under the powers of that section.

 

In addition, where the accounts of a company charity are audited under the provisions of the Companies Act 2006:

  • have sound knowledge of the legal requirements and duties placed on an auditor by sections 495 to 509 of the Companies Act 2006.

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