Will my charity require an audit?

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The new Labour Government has resurrected plans to increase the thresholds for company statutory audits but there is still no indication that any changes to the charitable sector levels are on the horizon.

The original planned increases under the previous administration were expected to exempt 132,000 non-charitable organisations from mandatory audits.

The threshold for statutory audits for charities broadly remains at £1m of incoming resources, or £500,000 in Scotland, a level that has not been adjusted since 2015. The subsequent inflationary drag over the past nine years is pushing more charities into the audit regime, increasing their operational costs when they are already grappling with rising expenses.

The UK and Scottish governments previously both proposed reviews of the thresholds for charities, although there have been no recent updates on this process and consequently no indication that any change is imminent.

Earlier in 2024, the Institute of Chartered Accountants in England & Wales (ICAEW) wrote to the UK Government suggesting some urgency in this process and expressed support for an increase in the audit threshold for charities. 

While the ICAEW has suggested that it might be helpful for smaller charities to have the option of dispensing with an annual audit, it isn’t just a question of cost, there are many benefits that a yearly audit brings for charities and their stakeholders.

Four advantages of an unqualified audit opinion

1. Attracting funding

An unqualified audit opinion is a factor many funders will consider when deciding whether to donate to or provide grant funding to a charitable organisation. The question, 'Was your last audit report unqualified?' is often found on the funder's pre-selection checklist. 

2. A good quality annual report

Funders will also frequently study the annual report before making a funding decision. The insights an auditor can provide whilst reviewing your accounts reduce the risk of omitting important information. This reassures funders about the efficient and transparent use of their investments and enhances the charity's reputation. 

3. Peace of mind

The annual audit 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 for oversight of the charity. It can provide some comfort that the organisation is being well run. The audit management letter provides advice on financial controls and processes and any improvements that can be made. It may comment on compliance with laws and regulations applicable to the organisation. A good management letter also provides trustees a view of the judgmental areas of the annual financial statements and whether management's view in these areas is appropriate and defensible.  Whilst the audit isn't, and shouldn't be, the only tool trustees take reassurance from, it is an important part of their armoury in protecting themselves against the personal and reputational risk they take on in the role.  

4. Accountability

An external statutory audit 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 made and transactions are properly documented. This underscores the crucial role of the annual audit in ensuring transparency and accountability within charitable organisations, a role that should not be underestimated and is essential for maintaining the trust of stakeholders. 

Whilst choice is a good thing, there are wider benefits an external audit brings for charities, their trustees and stakeholders.