OG 98 Power of the Commission to relieve trustees, auditors, etc from liability for breach of trust or duty

Last reviewed:
Last updated:
14 March 2012

Policy Statement/Overview

IMPORTANT NOTE

  • This is an interim conversion – all the information from the original format OG has been copied over into this new format.
  • The guidance has not undergone an extensive review at this stage; it will be reviewed and renumbered at a later date.
  • The Casework Guidance tab contains all the text from the original style OG; you may find it easier to navigate using the OG Contents tab. The other tabs remain empty until the OG is fully converted.

Summary of the guidance

This guidance explains the action to be taken by us when dealing with a request from an individual to relieve his/her personal liability for breach of trust or duty and also explains the roles of charity trustees, trustees, auditors and external examiners in respect of liability for breach of trust or duty.

Casework Guidance

Please read the IMPORTANT NOTE on the front page

OG 98 A1 - 14 March 2012

OG 98 A1 Power of the Commission to relieve Trustees, Auditors, etc from liability for breach of trust or duty

 

1.  What effect does the legislation have?

1.1 General provisions

This OG states the position after the Charities Act 2011.

Section 191(1) of the Charities Act gives the Commission power to make an order relieving an individual (see below) from his or her personal liability for a breach of trust or duty.  The power may be used to give full or partial relief.  Previously, only the court could grant this type of relief for trustees under section 61 of the Trustee Act 1925 and for directors and those scrutinising the accounts of charitable companies under section 1157(1) of the Companies Act 2006), (applied by section 44(3) of the 1993 Act to auditors and independent examiners appointed by charities).

Section 192 extends the court’s existing power to grant relief to an auditor, independent examiner, or reporting accountant  so as to include any person appointed to examine or report on a charity’s accounts, whether in accordance with a statutory provision or not. It replaced the section 44(3) with a provision which gives the court power to relieve from liability all those who report on charity accounts where it does not already have this power under section 1157 of the Companies Act 2000.

Section 192 also gives the court the power to relieve from liability a charity trustee of a Charitable Incorporated Organisation (CIO). This is necessary because section 61 Trustee Act 1925 does not apply to a charity trustee of a CIO. 

Section 191(4) provides that the power conferred by section 191(1) will not apply in relation to any personal contractual liability of a charity trustee or a trustee for a charity.

 

1.2 Who can apply for relief

The Act defines the persons who may be relieved from personal liability under section 191 as:

  • a charity trustee;
  • a trustee for a charity;
  • a person appointed to audit a charity’s accounts;
  • an independent examiner, reporting accountant or other person appointed to examine or report on a charity’s accounts.

 

1.3 What tests will we apply?

Section 191(2) sets out the test that the Commission must apply when considering whether to make an order or not.  The test will be satisfied if the Commission considers that:

  • the person in question is, or may be, personally liable for a breach of trust or breach of duty, but
  • that s/he has acted honestly and reasonably and ought fairly to be excused for the breach.

See OG 98 A2 for a fuller description of these terms.

 

1.4 What do we mean by liability?

Once we are satisfied that the tests in 1.3 above have been met, we can make an order under section 191(2) relieving that person wholly or partially from personal liability.  However, it is important to bear in mind that the purpose of the section is to provide a basis for relieving trustees etc from liability in suitable circumstances. Liability means financial liability for a loss suffered by the charity (see section 4 of OG 98 B1).   The event which gives rise to the liability on the part of the trustee etc. must actually have happened. 

Section 191 does not apply to debts of the charity which are owed to third parties.

The power conferred by section 191 to relieve trustees from liability for breach of trust of breach of duty does not extend to liability to account for unauthorised benefit. That view is based on the judgement in Guinness Plc v Saunders [1990] 2AC 663, in which the Court decided that a similar provision in company law (section 727 of the Companies Act 1985) could not be used to relieve the liability of a director who had received unauthorised remuneration. The Court took the view that a claim for repayment of unauthorised remuneration was not a claim for compensation for breach of trust or duty, but a claim based on the wrongful receipt of trust property. 

What counts as a suitable case will be determined by the considerations discussed below.

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2. Why have we been given this power?

This power reflects a concern in the charitable sector that fear of personal liability may deter people from becoming trustees or acting as an independent examiner for a charity (or otherwise volunteering).  We have seen cases in the course of our day-to-day work where a charity trustee, doing his or her honest best, has committed a breach of trust or duty that resulted in loss to the charity.  In these circumstances, we have decided not to take proceedings to recover that loss and also not to encourage the charity to take proceedings to recover the loss, on the basis that were an application to be made to the court for relief, we believe that it would be successful. But that does not offer the same degree of protection as actual relief.

Although the court has been able to grant relief where it believes that the trustee has acted honestly, reasonably and ought fairly to be excused, the fact that either the trustee lacked the means to go to court, or the amount involved was too small to justify the expense of legal proceedings, may have deterred trustees from going to the court.  Previously, the Commission has merely been able to indicate that it was not intending to pursue restitution (in cases of unauthorised remuneration). However, the power in section 191 now enables us to grant full or partial relief for personal liability if we are satisfied that the individual has or may have incurred a liability for breach of trust or duty but has acted honestly and reasonably and ought fairly to be excused.

As this is a new power, it is difficult to predict what types of cases we will be dealing with and how many we will receive. This OG will need to be reviewed as other legislation comes into force, and any lessons learnt from casework can also be incorporated if necessary.

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OG 98 A2 - 14 March 2012

OG 98 A2 Rules, Duties, Responsibilities

 

1. Charity trustees

The definition of “charity trustee” is in the Operational Guidance Glossary.

The charity trustees of a Charitable Incorporated Organisation (CIO) and the directors of charitable companies will be subject to a specific statutory duty of care generally as regards the discharge of their functions (Chapter 2 of the Charities Act 2011 [CIOs] and section 174 Companies Act 2006 [charitable companies]). The trustees of trust based charities are already, in relation to some of their functions, subject to the duty of care set out in section 1 of the Trustee Act 2000 (see OG 86 B6). But these statutory duties essentially bring together similar duties existing generally under the common law: these common law duties continue to apply where they have not been set out in statute.  

All trustees have a duty of care towards their charity.  These duties mean that trustees should:

  • use reasonable care and skill in their work as trustees, using their personal skills and experience as needed to ensure that the charity is well-run and efficient; and
  • consider taking external professional advice on all matters not within their own skills and experience, particularly where there may be material risk to the charity, or where the trustees have a concern that they may be acting in breach of their duties.

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2. Trustees for a charity

The definition of “trustees for a charity” (custodian and holding trustees) is in the Operational Guidance Glossary.

By virtue of section 4(2) of the Public Trustee Act 1906, a custodian trustee has custody of all securities and documents of title relating to the trust property. The custodian trustee must concur in and perform all acts necessary to enable the charity trustees to exercise their powers of management.

The powers of holding trustees (unlike those of a custodian trustee) vary and can be ascertained only by referring to the charity’s governing document or other documentary evidence.  Very often, holding trustees are required to act only in accordance with the instructions of the charity trustees.  However, the charity’s governing document may give them additional functions in the administration of the charity.

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3. Auditors

An audit for the purposes of the requirements of Part 8 of the Charities Act is the scrutiny of accounts by a registered auditor who must apply international auditing and UK audit standards, including Audit Practice Note 11, produced by the Auditing Practices Board.  A registered auditor is one eligible for appointment as an auditor of a company in accordance with section 25 of the Companies Act 1989.  NHS charities are subject to a special audit regime in accordance with sections 145(3), 152(4) and 145(4) of the Charities Act. In some charities, for example those connected with local authorities, dispensation from the audit requirements of Part VI is possible in accordance with regulation 10 of the Charities (Accounts and Reports) Regulations 2005, if adequate alternative auditing arrangements are in place.

For certain types of charity, for example charitable companies or those registered social landlords that are exempt charities, the requirements for the preparation and scrutiny of their accounts and reports are set out in the legislation appropriate to that type of charity.  Where a charity is neither a company nor an exempt charity, it must (if the audit requirement applies) have its accounts audited by a person who:

  • would be eligible for appointment as auditor of the charity under section 25  of the Companies Act 1989 if the charity were a company, or
  • is a member of a body for the time being specified in regulations under section 156(1) of the Charities Act and is under the rules of that body eligible for appointment as auditor of the charity (no such regulations have been made).

The audit requirement applies where the charity’s gross income in that year exceeds £500,000 or the charity’s gross income in that year exceeds the accounts threshold and at the end of the year the aggregate value of its assets (before deduction of liabilities) exceeds £2.8 million.  The accounts threshold is £100,000 or whatever sum is specified in section 133 of the Charities Act.

Following the audit, the auditor is required to give an opinion as to whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.  In giving that opinion, the auditor expresses an opinion as to whether the financial statements give a ‘true and fair’ view.

For company charities subject to the Companies Act audit regime, the requirement for an audit is set out in the Companies Act 2000 section 475 and the contents of an audit report and the duties of auditors in section 495. 

For all other charities subject to audit, the requirement for an audit is set out in sections 145 to 148 and section 152, 153, 174 and 193 of the Charities Act, and the required content of the audit is set out in the Charities Act section 154 and The Charities (Accounts and Reports) Regulations 2005, regulation 7.

In conducting their audit, the auditor has regard to the Standards and Guidance published by the Auditing Practices Board and to the guidance issued by their own professional body for members in practice.

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4. External examiners

Under the Act, non-company charities;

  • whose gross income is over £10,000 but not over £500,000 in the relevant financial year and gross assets are not over £2.8m; or
  • where gross assets exceed £2.8m and the charity’s gross income is not over  £100,000;

may elect to have an independent examination of their accounts. There is no requirement for independent scrutiny where gross income is £10,000 or less (unless the charity’s governing document requires it).

However, if such a charity’s gross income in a year exceeds £250,000, an independent examiner will have to be an independent person who is:

  • a member of a body for the time being specified in section 249D(3) of the Companies Act 1985 (reporting accountants);
  • a member of the Chartered Institute of Public Finance and Accountancy; or
  • a fellow of the Association of Charity Independent Examiners.

Otherwise, an independent examiner is required by the Act to be “an independent person who is reasonably believed by the trustees to have the requisite ability and practical experience to carry out a competent examination of the accounts”.

Following the examination, the independent examiner is required to produce a report.  The specific reporting duties are detailed in Independent Examination of Charity Accounts:Examiners Guide CC32.  In the report, the examiner must state whether or not any matter has come to his attention in connection with the examination which gives reasonable cause to believe that:

  • proper accounting records have not been kept;
  • the accounts do not accord with such records; or
  • the accounts fail to comply with relevant regulations.

The report should also include details of the following matters where they have become apparent:

  • material expenditure or action contrary to the trusts of the charity;
  • failure to provide information and explanations to which the examiner is entitled; or
  • evidence that accounts prepared on an accruals basis are materially inconsistent with the trustees’ annual report.

The examiner’s report must be signed by the examiner in his / her own name as the appointment relates to the individual rather than to any partnership or company he/she works for.

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OG 98 B1 - 14 March 2012

OG 98 B1 Operational procedures

 

1. The application

There is no specified form of application, and no publication requirement for an Order under section 191 of the Act and we will generally consider making such an Order on the informal application of the person seeking relief. This is similar to the approach taken when making Orders under section 105 of the Act.

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Operations will deal with applications in the initial stages with Legal and/or accountancy advice (see below).  The decision as to whether to make an Order or not under section 191 will rest with a Head of Legal Services.  Operations will:

 

  • consider whether an application has enough evidence to support the request for relief of liability.  Case workers may need to take informal legal advice if they are unsure whether there is a prima facie case;
  • collate the evidence and refer it to Legal.  The Head of Legal Services will be responsible for making the decision;
  • inform the applicant of our decision.  If the decision is that we will not relieve the liability, the reasons for our refusal should be set out;
  • make the Order if appropriate.  

 

lawyer_referconsult

Where applications are from charity trustees and holding and custodian trustees, case officers will need to refer them to Legal Services once all relevant information has been gathered and collated.  Applications from auditors and external examiners will need accountancy advice (as well as legal) as we may need to look at whether professional standards have been complied with.

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2.  What information will we need?

The applicant will need to provide us with detailed information and the bullet points below should be used as a guide (some points may not be applicable depending on who is applying).  The case officer should refer an applicant or enquirer where possible to this OG on our website in order that a proper case can be made to us without the need for unnecessary correspondence.  It is in the interests of both the applicant and the Commission for as comprehensive a case as possible to be made at the outset in order to achieve the speediest and most appropriate outcome.  The information we will usually need is: 

  • the charity name and number;
  • the correspondence address;
  • in what capacity was the applicant acting in relation to the charity i.e. charity trustee, trustee for the charity, auditor, independent examiner or reporting  accountant (see OG 98 A2);
  • evidence to show that the application is made with the knowledge of the charity trustees;
  • a description of the breach of trust or duty that has led to the actual or possible liability;
  • what sums are involved;
  • why the applicant believes that he or she acted honestly and reasonably and ought fairly to be excused for the breach.  In this connection, the following issues may need to be addressed depending on who is making the application:
    • why did the applicant act as he or she did?  Why did the applicant think that acting in that way was proper and on what considerations was that view based?
    • what did he or she think would be the effect of his or her actions on the charity?
    • did he or she act alone or with others or with the knowledge and/or approval of others and what evidence is there to support this?
    • why did he or she consider that the action would be in interests of the charity?
    • was he or she suitably qualified to take the action, or make the decision in question?  Did he or she take professional advice?
    • is legal action in relation to the alleged breach threatened or underway?  Is there evidence to show that this is the case?

 

  • if the applicant has insurance (trustee indemnity insurance, professional indemnity insurance etc), an indication of whether the applicant has approached his/her insurers for reimbursement and the outcome of his/her claim.
  • the reasons why it is considered fair - for both the individual concerned and the charity - to excuse the individual;
  • such supporting information and evidence as the applicant is able to provide in support of his or her application.

What supporting documentation we will need will depend on the circumstances.  Typically, we will want to see minutes of meetings where decisions affecting the application have been taken, letters from insurers (if applicable) setting out why the personal liability is not covered by the individual’s insurance cover.

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3. What will we be considering?

This section aims to set out the context in which each case under section 191 of the Act should be considered.  Section 4 provides background information on issues that may arise in a case, such as trustee indemnity insurance, breaches of trust and strict liability offences. Sections 5, 6, 7 and 8 deal with the differing issues that we might need to look at in applications from each type of individual that can apply for relief under section 191 (see OG 98 A1). 

The onus is upon the applicant to provide sufficient information and evidence to support the application.  We may need to call for additional information.  Our assessment will be based upon the information provided and any light that the charity’s trustees are able to throw upon the circumstances of the case.

When determining whether to make an order, and in exercising the power, we will need to take into account:

  • the circumstances described in the application;
  • the financial circumstances of the charity as affected by the breach of trust or duty;
  • the applicant’s role and responsibility in the matter;
  • the applicant’s skills and qualifications and experience in so far as they relate to the circumstances and the application; and
  • the amount of loss or potential loss involved.

It is important to bear in mind that the test for action under section 191 is not “expediency in the interests of the charity” as it is, for example, in section 105 of the Charities Act.  The presumption behind our use of the power in section 191 is that it would be expedient in the charity’s interests for it to enforce the claim against the trustee etc.  If it would not be expedient in the charity’s interests for the charity to enforce the claim (for example if the amount at stake was very small) then the claim should not be pursued anyway. However, the trustee would continue (in principle, at least,) to be liable.

 

“Reasonably”

We must look at each case on its merits with regard to what counts as acting “reasonably” for the purposes of section 191(2). This is what the courts have done in the interpretation of section 61 of the Trustee Act 1925, which is the nearest model that we have.  Standard trust law textbooks give examples of cases where the courts have decided that a trustee has acted reasonably or has not acted reasonably.

 

Fairness

The key question in relation to section 191 is whether it is “fair” for the charity to pursue a claim against a trustee or other, notwithstanding the fact that the trustee has acted “honestly” and “reasonably”.  It may be that the pursuit of claims against trustees who have acted honestly and reasonably will adversely affect the ability of the charity to recruit trustees. Our duty to act, so far as is reasonably practicable, in a way which is compatible with encouraging voluntary participation in charity work needs to be considered alongside our compliance objective.

Our decision will inevitably involve consideration as to whether the charity or the trustee etc. should bear the financial loss in question (or, as the case may be, have the benefit of the profit in question). It will usually be a matter of considering a range of factors when deciding what is “fair” or not.

The skill levels, for example professional qualifications or experience, of any person seeking relief will be taken into consideration in deciding whether or not it is “fair” to provide relief.  It follows therefore that the more relevant knowledge and experience an individual has of a particular issue - say investment management - the less likely it is that he or she will be able to show that they ought fairly to be excused from a liability incurred.  But the point should also be made that the level of payment which the person has received for their services will also be a relevant factor in determining whether it is “fair” to provide relief.

Section 191 gives the Commission the power to grant partial relief of personal liability as well as full relief.  The purpose of the power under section 191 is to relieve financial liability so we will need to consider whether an individual ought fairly to bear none or only some of the liability.  The trustee must, of course, be given the opportunity to make representations on the matter if we propose to grant only partial relief.

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4. Charity trustees – key issues

4.1 When does liability arise?

Personal liability arises when a trustee has to pay out of his or her own pocket to make good a financial loss suffered by the charity.  A loss may arise as a result of the trustee acting in breach of trust (for example, by making investments which are outside the powers of the charity) or in breach of duty.  The most common breaches of duty are breaches of the duty of care (for example, not taking professional advice in circumstances where a reasonable person would not even consider acting without the benefit of such advice);

 

4.2 When can charity trustees be indemnified out of charity funds?

Trustees who have acted properly in the administration of the charity have a statutory right to an indemnity out of the funds of their trust.  They can be recompensed for any liability they properly incur.  Subject to what is said in paragraph 4.3 below, trustees cannot be indemnified by the charity for losses or expenses which they have incurred in breach of trust.

A question of a trustee being indemnified out of the charity’s assets (and therefore not in need of an order under 191) should be considered on a case-by-case basis.  A charity trustee who has, through no fault of his/her own, incurred a civil or criminal liability in the course of administering a charity, may nonetheless be entitled to an indemnity.  This is most likely to be an issue in cases of strict liability offences (see below), vicarious liability in tort, inherited liability under section 151 of the Finance Act 1989 and some employer liabilities.

lawyer_refer

In all such cases, legal advice should be sought.

 

Note: A strict liability offence is one where liability can be conferred simply by carrying out a particular action or by being in a particular place. The prosecution in such a case doesn’t have to prove fault. Most such offences are statutory rather than in common law, and aimed at the regulation of activities deemed not to be in the public interest e.g. offences relating to pollution, driving, food hygiene and health and safety at work.

 

4.3 Are they covered by trustee indemnity insurance?

Section 189 of the Act provides that trustees can use their charity’s money to buy trustee indemnity (or liability) insurance (TII) except where the governing document of the charity expressly forbids its purchase (see OG 100). 

TII will not normally cover:

  • protection for trustees of unincorporated charities against the risk of personal liability arising from contracts that they have entered into on behalf of their charities with third parties; or
  • civil liabilities in tort to third parties (for example, for negligence).

It should be noted that TII may cover charity trustees against types of liability that are likely to be outside the Commission’s power to relieve.  For example, TII may cover trustees against negligent breaches of trust which, as the Commission has to consider that a trustee has acted honestly and reasonably (see OG 98 A1), will almost certainly be outside the scope of section 191.

Where a charity has obtained insurance that covers both the loss to the charity and the liability of the trustee to make good that loss, there will be no net loss to the charity and no liability that needs to be relieved under section 191.

We will need to be clear in each case exactly what relevant insurance cover the charity has obtained.

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5. Trustees for a charity – key issues  

A custodian trustee will not be liable for any act or default on the part of the charity trustees unless he/she concurs in a breach of trust.  The custodian trustee should, therefore, be familiar with the trusts of the charity for which he/she holds property.

Unlike custodian trustees whose role and duties are governed by statute, any provisions that govern circumstances in which holding trustees can decide not to act on the instructions of the charity trustees (e.g. where the charity trustees are acting in breach of trust or duty) will be set out in the charity’s governing document.  A trustee for a charity will be liable for a breach of trust if he or she knowingly assists the charity trustees to commit a breach of trust.  In practice, a person who acts in this way is unlikely to be able to satisfy the Commission that he or she has acted “honestly and reasonably”.

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6. Auditors – key issues

An auditor’s professional indemnity insurance will normally cover losses arising from poor audit practice leading to mistakes or errors of judgement, and it will be appropriate for auditors to approach their own insurers in the first instance before seeking relief from any personal liability incurred from us.

Auditors are responsible for conducting their audit in accordance with the law and international standards of audit and UK audit standards.

Audits are required only for larger charities and an audit is a higher standard of scrutiny than that of an independent examination. However, the occurrence of a fraud or loss in a charity that has been audited is not sufficient evidence to attribute such a loss to the auditor’s oversight. The auditor is only required to plan their audit with a reasonable likelihood of identifying material fraud.

Higher standards are normally expected of those with professional qualifications or holding themselves as specialists, such as auditors, and accountancy advice should always be taken concerning the merits of an application. This will be relevant to the issue of whether it is fair to relieve them. Where relief is sought by an auditor, the views of the charity’s trustees should also normally be sought.

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7. Independent examiners – key issues

Independent examiners fall into two groups; those that are lay examiners with sufficient skills to examine charity accounts and qualified examiners who must be suitably qualified (see section 4 of OG 98 A2). An independent examination is not an audit and the examiner can place considerable reliance on the explanations provided by trustees or charity staff. Only where those explanations are insufficient, or other circumstances require it, is any vouching of individual items or transactions required.

In parallel with the view taken by the courts of trustees who have no particular expertise, a lower threshold of care is expected of lay examiners. Unlike lay examiners, qualified examiners are members of a recognised body and are subject to that body’s requirements concerning ethics, expertise and competence in practice and a high standard is expected, irrespective of whether a fee is charged for the independent examination carried out.

Independent examination should be conducted in accordance with the directions made by the Charity Commission and the examiner’s report should comply with Regulation 8 of the Charities (Accounts and Reports) Regulations 2005.

The most likely circumstance to arise is a failure by the examiner to conduct an analytical review and thereby fail to identify significant matters that require explanation or selective vouching.

If any actions or omissions on the part of the independent examiner cause or contribute to a material loss to the charity e.g. failing to identify a breach of trust or other misuse of the charity’s property, it might be possible for an independent examiner to share personal liability with one or all of the charity trustees.

Higher standards will normally be expected of those with professional qualifications or holding themselves as specialists, such as a qualified examiner.  This will be relevant to the issue of whether it is fair to relieve them.  Charities subject to independent examination are small and the amount of charitable funds and assets at risk are comparatively small.

accountant_refer

Accountancy advice should always be taken concerning the merits of an application. Where relief is sought by a qualified examiner, the views of the charity’s trustees should also normally be sought.

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8. Reporting accountants – key issues

Reporting accountants must be members of a body specified by the Companies Act . An audit exemption report (accountant’s report) is not an audit and is little more than a consistency check between the accounting records and the accounts prepared.

Unlike lay independent examiners, reporting accountants are members of a recognised body and are subject to that body’s requirements concerning ethics, expertise and competence in practice and a high standard is expected, irrespective of whether a fee is charged for the accountant’s report carried out.

An accountant’s report should comply with guidance issued by the Audit Practices Board.

The most likely circumstance to arise is a failure by the reporting accountant to check that the accounts provided are consistent with the underlying accounting records. The occurrence of a fraud or loss in a charity that has been examined is not sufficient evidence to attribute such a loss to the reporting accountant’s oversight.

If any actions or omissions on the part of the reporting accountant cause or contribute to a material loss to the charity e.g. failing to identify a breach of trust or other misuse of the charity’s property, it might be possible for a reporting accountant to share personal liability with one or all of the charity trustees.

Higher standards will normally be expected of those with professional qualifications or who put themselves forward as specialists. This will be relevant to the issue of whether it is fair to relieve them. Company charities subject to an accountant’s report are small and the amount of charitable funds and assets at risk are comparatively small.

accountant_refer

Accountancy advice should always be taken concerning the merits of an application. Where relief is sought by a reporting accountant the views of the charity’s trustees should also normally be sought.

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