Policy paper

A benchmark for the external scrutiny of charity accounts

Published 28 August 2019

Why set a benchmark?

The trustees of registered charities and also of charities excepted from registration are required to have an external scrutiny of the charity’s accounts if the charity has a gross annual income of over £25,000 in the reporting period (financial year). The external scrutiny is either an independent examination or an audit.

The independent examiner or auditor plays an important role in underpinning public confidence in charities because their work involves a review of the charity’s accounts. The auditor gives an opinion as to whether the accounts are ‘true and fair’ whereas the independent examination undertakes a limited check of a certain specific matters.

Trustees and the reader or user of those charity accounts will expect that the external scrutiny was done properly. However, the evidence from our thematic research on charity reports and accounts has shown that too many independent examiners and auditors appear to lack the necessary understanding of the external scrutiny framework for charities and of their reporting duties.

Our aim is that all external scrutinies meet a minimum standard thereby assuring the public that they can read the accounts with confidence. By setting a benchmark we can give trustees and the reader and user of charity accounts a way of checking that the basics will have been covered.

Will having a benchmark make a difference?

We anticipate that in publishing this benchmark, by working with the accounting profession and the charity sector, and by following through on our research findings that we will see the standard of external scrutiny improve.

Having a benchmark helps because it will:

• check that a minimum standard of work has been done and so the basics will be right
• enable trustees to assess whether their independent examiner or auditor obviously lacked the necessary understanding of charity independent examination or charity audit requirements
• enable us to work with the accountancy profession to tackle shortcomings in the work of professionals where these are identified
• enable us to identify and take action if the independent examiner or auditor have not reported a matter of material significance to us
• provide a basis for us to advise or direct trustees to change their independent examiner or auditor and/ or to have the external scrutiny redone because it failed the benchmark
• facilitate our regulatory case work by identifying those external scrutinies that fail the benchmark

What is the external scrutiny benchmark?

The benchmark is proportionate to the size and legal form of the charity being reviewed, with more expected where the accounts are prepared on an accruals basis under the Charities Statement of Recommended Practice (SORP).

The benchmark comprises 15 criteria, 9 of which apply irrespective of whether the external scrutiny is of receipts and payments or accruals accounts. The other 6 criteria apply only to the external scrutiny of accruals accounts.

Criteria that apply to the external scrutiny of receipts and payments and accruals accounts

Trustees’ annual report

• for registered charities, there is a trustees’ annual report or, if a company, a combined trustees’ annual report and directors’ report

External scrutiny report

• there is an independent examination report or audit report.
• there is an audit report if an audit is required by the charity’s size
• the external scrutiny report is worded correctly with reference made to the correct legislation

The accounts

• there is a receipts and payments account or a statement of financial activities
• there is a statement of assets and liabilities or a balance sheet
• the accounts are internally consistent, i.e. the closing funds balance within the receipts and payments account or statement of financial activities is consistent with the statement of assets and liabilities or balance sheet
• the accounts add up correctly
• unrestricted and restricted funds are clearly identified

Criteria that apply to the external scrutiny of accruals accounts only

The accounts

• the accounts have been prepared on an accruals basis, if required by the charity’s size or because it is a company
• the accounting policies note states that the accounts have been prepared under the correct Charities SORP
• the notes disclose all of the required related party transactions as required by the Charities SORP
• the statement of financial activities either incorporates an income and expenditure account or there is a separate income and expenditure account, if the charity is a company
• consolidated accounts have been prepared if applicable and required by the charity’s size
• there is a cash flow statement, if required by the charity’s size

The responsibility for the preparation of the trustees’ annual report and accounts is with the trustees. If the independent examiner or auditor has flagged any failings as concerns in the independent examiner’s report or as matters for attention in their audit opinion the scrutiny may not fail the benchmark.

What is the basis for setting the benchmark?

The benchmark covers the vast majority of charities but does not cover Common Investment Funds and Common Deposit Funds or educational or housing charities that do not prepare their accounts in accordance with the Charities SORP.

In setting this benchmark our focus has been on having objective criteria based on charity law in England and Wales and, where appropriate, the Directions for independent examiners and International Standards of Auditing applicable in the UK. Please refer to the annex for the cross references to these requirements.

The legal requirements for the external scrutiny of reports and accounts are extensive and this benchmark is only a minimum intended to identify those external scrutinies that clearly fall short of what is required.

Help is available to independent examiners in the form of accounts templates for smaller charities on our web site and in the Guidance for independent examiners (CC32). Auditors should refer to their professional body for assistance.

How is the Commission working with professional accountancy bodies to raise standards?

As a regulator, the Commission is concerned with making sure that charities offer accurate, up-to-date and relevant information about themselves, enhancing their accountability to donors, beneficiaries and the general public.

Where an audit or independent examination is carried out by a person who is a member of a professional body we may draw to the attention of their professional body any non-compliance with the benchmark. We would do this to help professional bodies understand the training needs of the person concerned and the incidence of a lack of competence across their membership so that they can take action to help their members perform well and drive up standards.

The response of professional bodies to this information will also provide evidence as to the degree to which these bodies are seeking to ensure that their members, whether volunteering as trustees or working as practitioners, are equipped and supported in understanding charity filing and scrutiny requirements.

The Commission may also choose to use non-compliance with the benchmark either alone, or in combination with other issues that we have identified regarding the conduct or work of an independent examiner or auditor, as the basis to raise a formal complaint with that person’s professional body. We may do this whether or not we have an active case involving the charity.

Effective date of application

This benchmark is applied by the Accountancy Services Team from August 2019.