With the noise around changing audit thresholds, trustees of smaller charities may be thinking “what about me?” The following considers how trustees can obtain accountability and support even when a charity is below the audit threshold.
What is an Independent Examination?
Generally, a full annual financial audit is not required for small charities with income of between £25,000 and £1,000,000. Instead, independent scrutiny is applied through an independent examination.
This is a lower level of assurance and does not require the detailed testing that a full audit involves.
The 'examiner' can be an individual or an accountant from a firm. The examiner does not need to be a certified accountant for charities with income between £25,000 and £250,000.
Whilst some charities may view the independent examination as a necessary evil to get out of the way as soon as possible each year, the exercise can be valuable, and it is worth spending time making sure that you have the right examiner in place to add as much value to the process as possible.
Below, we look at the benefits of an independent examination and how to ensure you get from your chosen examiner.
Four benefits of a good independent examination
Reassurance to funders
Funders will frequently study the trustee report with the annual report and accounts before making a funding decision. By undertaking an independent examination, the examiner will be able to provide a fresh pair of eyes on the narrative you provide to the outside world on how you support beneficiaries and achievements during the year. A good examiner is not just looking for errors or omissions in your narrative, but also for positive ways the report can best present the charity. An incisive trustee report reassures funders about the efficient and transparent use of their investments and enhances your charity's reputation.
Financial statements that are compliant and promote the charity
Charity accounts are complex. The regulations under the Charity SORP (Statement of Recommended Practice) require the correct application of rules around restricted funds, and there are many additional disclosures for charities compared to commercial entities for example. Many small charities will not have the resources to employ this expertise in-house for what is essentially a once-a-year exercise.
Although the examiner should be 'independent', in most cases, the examiner will also prepare the year-end financial statements as well as carrying out their review. With this in mind, engaging an examiner with the requisite charity knowledge and skills is essential to ensure the financial statements comply with charity legislation.
A thorough review will point out how the accounts can best present the charity. The components of disclosed 'support costs' are a great example. Many charities throw the kitchen sink in here in terms of the costs they include, however, this is not necessarily required, and such a presentation can suggest that donated income is being diverted away from spending on beneficiaries to cover overheads. An experienced charity examiner can help with what is required to include in this category, and commonly, it is less than many small charities show.
Peace of mind
The annual independent examination is more than just a valuable exercise regarding external perception. For trustees who are volunteers and rarely operate full-time within an organisation, the exercise helps them carry out their responsibilities to oversee the charity. It can provide some comfort that the organisation is being well run. A good examiner will advise on financial controls and processes, and any improvements that can be made. They may comment on compliance with laws and regulations applicable to the organisation. Whilst the examination isn't, and shouldn't be, the only tool trustees take reassurance from, it is an important part of the armoury in protecting yourself against the personal and reputational risk you take on in the role.
Accountability
An independent examination is important in promoting accountability within an organisation. The knowledge that once a year documents and judgements reached will be subject to scrutiny, can help foster a culture whereby the rationale for decisions and transactions made are properly documented. This underscores the crucial role of the annual independent examination in ensuring transparency and accountability within charitable organisations, a role that should not be underestimated and is essential for maintaining the trust of stakeholders.
If you would like more information about how an independent examination could be valuable to your organisation, please get in touch. Call 0808 144 5575 or email help@armstrongwatson.co.uk.
