Ten tips for charity accounts success
We share ten tips for success in the preparation, independent examination and audit of charity accounts
Key points
- Be aware of the legislation.
- Always follow the strictest requirements.
- ‘True and fair’ accounts must comply with the Charities SORP (FRS 102) and full FRS 102.
- Charities are not entitled to the same filing concessions as private companies.
- Don’t rely solely on accounting software.
- There is only one set of statutory accounts.
- Legislative references should be tailored to the circumstances of the charity.
- Charity trustee boards should take ownership of the Trustees’ Annual Report.
- Examiners and auditors shouldn’t rely on a single point of contact at a charity.
- Change is the only certainty.
1. Be aware of the legislation
It is easy to go wrong given the degree of legislative complexity around charity accounting and external scrutiny. If you do go wrong, this can lead to accounts being rejected by a charity regulator and/or Companies House.
The legislative requirements which apply to a charity should be reflected in the engagement letter. When drawing up the engagement letter, don’t forget to review the constitution of a potential client. It may contain more stringent requirements than the law; most common is the requirement for an audit rather than an independent examination, even if the charity is below the audit threshold.
During the accounts preparation and external scrutiny process don’t forget to double-check that accounts and scrutiny thresholds are being complied with. Late adjustments can push a charity from receipts and payments accounts to ‘true and fair’ accounts or from independent examination to audit.
2. Always follow the strictest requirements
Charity law requirements are likely to be more stringent than other legislative requirements which may apply to a charity, for example, company law requirements.
Applying the strictest requirements doesn’t mean other legislation can be dis-applied (also, see Tip 1). For example:
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A Scottish charitable parent company preparing group accounts, due to exceeding the Scottish charity law threshold, must prepare its group accounts under both Scottish charity law and company law. The Scottish charity law threshold for group accounts is gross income of the group, after consolidation, adjustments of £500,000 or more.
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ICAS expects that as a matter of good practice charitable companies should not elect for audit exemption under company law when receiving an audit under charity law. We take a different view from the Financial Reporting Council and the UK charity regulators on this point.
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A charity registered with the Charity Commission for England and Wales (CCEW) which, due to its Scottish operations, is also registered with the Office of the Scottish Charities Regulator (OSCR) must comply with the Scottish Charity Accounts (Scotland) Regulations 2006 (as amended). Scottish charities have a lower audit threshold than charities based in England and Wales because the Scottish Regulations have a lower gross income condition. In Scotland, a charity requires an audit if its gross income is £500,000 or more, whereas in England and Wales a charity requires an audit if its gross income is over £1 million.
3. ‘True and fair’ accounts must comply with the Charities SORP (FRS 102) and full FRS 102
Charities are unable to take advantage of the presentation and disclosure concessions afforded by Section 1A for FRS 102.
There is no explicit statement within FRS 102 that charities cannot apply Section 1A and no specific prohibition within charity and company accounting regulations: this has led to uncertainty about the applicability of Section 1A. However, for a charity’s accounts to give a ‘true and fair’ view, compliance with the Charities SORP (FRS 102) and full FRS 102 is required.
The Statement of Cash Flow exemption afforded by the Charities SORP (FRS 102) is stricter than the concessions afforded by FRS 102, in that the Charities SORP requires charities with a gross income of more than £500,000 to prepare a Statement of Cash Flows.
Entities eligible to apply Section 1A, which are not charities, can choose to comply with full FRS 102 but don’t have to prepare a Statement of Cash Flows.
4. Charities are not entitled to the same accounts, scrutiny and filing concessions as non-charitable companies
As custodians of charitable assets and recipients of public money, through private donations and/or through public sector grants or contracts, charities are both required and expected to be more accountable to the public than, for example, private companies.
While there are concessions available to certain charities arising from charity law or from the Charities SORP (FRS 102), flexibility afforded or concessions arising under FRS 102 or from company law may not be available to charities.
While some stricter requirements are generally known about, such as stricter audit thresholds for charities in each of the three UK charity law jurisdictions, others are less well known.
Charities are not permitted to prepare and/or file abridged accounts or prepare and/or file micro-entity accounts under FRS 105.
Charitable companies are not permitted to file filleted accounts with OSCR. While charitable companies are not prohibited from filing filleted accounts with Companies House, doing so offers no added value to charitable companies and therefore is not good practice.
5. Don’t assume that accounting software filing options are appropriate
Do not rely on the filing options offered by accounting software. First, the software doesn’t always get it right as it may not be sufficiently tailored to the requirements of charities. Second, ICAS members should ensure they are familiar with the filing requirements which apply to their charity clients. These are more complex than they first appear.
6. There is only one set of statutory accounts
It is normally a requirement for a charity to file its full statutory accounts with the relevant regulators. There are exceptions: certain charities in England and Wales have filing concessions and while charitable companies are not prohibited from filing filleted accounts, these are not really appropriate (see Tip 4).
A charitable parent company filing group accounts with a UK charity regulator must also file those accounts with Companies House. It is not acceptable for the charitable parent company to file its own individual accounts with Companies House when it has prepared statutory group accounts.
The group accounts are the charitable parent’s statutory accounts.
7. Legislative references should be tailored to the circumstances of the charity
The audit requirements for charities can be fiendishly complicated depending on the circumstances of the charity. The requirements in England and Wales are particularly difficult to navigate especially when it comes to charitable company audits.
Key to success is identifying all the legislation which is relevant to the external scrutiny of a charity.
ICAS has prepared the following guidance which should assist charity auditors and their clients identify the underlying legislation:
An independent examination is solely a charity law engagement, and independent examiners should refer to the charity law requirements in the relevant jurisdiction(s) in their examiner’s reports.
The following guidance on independent examination and independent examiner’s reports has been published by the UK charity regulators:
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The Charity Commission for England and Wales guidance - Independent examination of charity accounts
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The Charity Commission for Northern Ireland’s Independent examination of charity accounts: examiner’s guide and example reports
8. Charity trustee boards should take ownership of the Trustees’ Annual Report
The UK charity regulators are keen to emphasise the importance of trustee boards taking ownership of the Trustees’ Annual Report (TAR). The TAR is an opportunity to tell the charity’s story. It doesn’t have to be prepared solely to comply with the legislation, although this is important too.
Independent examiners and auditors should refuse any requests to draft the TAR on behalf of a charity client and charity treasurers shouldn’t be left to prepare the TAR as a ‘box-ticking’ exercise.
Ideally, charity trustees should be thinking about the content of next year’s TAR in the previous financial year. If a charity is to report on its outcomes, it needs to determine what it's seeking to achieve and introduce processes to gather the relevant information from the beginning of the financial year.
9. Independent examiners and auditors should not rely on a single point of contact at a charity
While it’s not the independent examiner’s or auditor’s responsibility to detect fraud, having the accounts independently scrutinised can act as a deterrent to internal fraud. External scrutiny also increases the prospect of discovery.
Small charities don’t have the same scope as larger charities to implement and operate comprehensive internal control arrangements, such as segregation of duties. There is also a tendency for those involved in running charities to be viewed as trustworthy and beyond reproach. Therefore, it may be tempting for the trustees to rely wholly on a single individual to take charge of the finances.
It is therefore essential, for example, that an independent examiner does not rely on one person as the single point of contact and source of financial information at a charity. While such an approach does not guarantee that fraud will be prevented or detected, it will reduce the risk.
Independent examiners can also make recommendations verbally or in writing to a charity’s trustees if they have recommendations for improving the charity’s governance arrangements, internal controls and financial management. There is no requirement to make recommendations, but this is an area where ICAS members can add value.
10. Change is the only certainty
Charity trustees, charity finance staff and charity advisers who are ICAS members should keep up to date with sector developments and ensure that they comply with ICAS CPD requirements. Even if your involvement with charities is not part of your day job or you only have a handful of charity clients, it is worth keeping an eye on the following websites for developments:
There is a sign-up facility on the OSCR, CCEW and FRC websites for alerts. Also, the Charity Commission for Northern Ireland website has a latest news section.
Updated in March 2024: These tips were originally published as two articles in December 2018.
Categories:
- Charities
- Corporate & financial reporting
