The impact on charities of Restoring trust in audit and corporate governance

20 May 2021

This major government document sets out a package of measures aimed at improving the UK’s audit, corporate reporting and corporate governance systems. 

Proposed changes would affect large entities, mainly companies, as well as individual directors, audit firms, and the regulatory environment relating to corporate governance and reporting.

Most of the report’s 230 pages are focussed on the commercial world, and BDO has produced a separate guide addressing those points. However some proposals either will, or may, affect charities. That is because either a charity is defined under these proposals as a Public Interest Entity (PIE), or because the changes are generic to all corporate reporting, or because a charity may wish to adopt some of the proposals as best practice.

Our summary below sets out the principal points of interest to charities, and especially those that will fall to be defined as PIEs. The consultation document suggests that a quantitative threshold be applied (and an annual income of at least £100m is given as a example) but acknowledges that there may be other, more suitable, approaches to defining a public interest entity as the concept applies to not-for-profit organisations and invites comments on what those approaches might be. Charitable PIES are generally expected to be required to follow the proposals 2 years after they apply to quoted companies. 1.3.29

For many charities, this will not just be a matter of adapting to the new proposals, but implementing the various detailed measures that already apply to PIEs. These include statutory requirements relating to audit rotation, with tenders at least every 10 years, strict limits on the ability of auditors to provide additional services, and longer audit reports running to several pages setting out key audit matters, and more detail on areas like scope and materiality.

Directors Accountability

PIE Directors would produce an annual statement, acknowledging their responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting. This would be included in the annual report and subject to audit by agreement with the audit committee. 2.1.41

We note that charities are already required to confirm such a review has happened as part of the annual return process – however the audit processes involved are likely to be more detailed and therefore, more expensive.

There should be stronger definitions and greater disclosures over distributable reserves. 2.2.2.

This may impact trading subsidiaries’ ability to make gift aid payments, but could usefully harmonise with existing regulatory guidance on charities reserves

New corporate reporting

PIEs should include a resilience statement, based on more than one scenario and looking ahead, covering major risks including those relating to solvency, supply chain, cyber, climate risk and investment needs. This will have at least a 5 year time horizon, and may be extended to a longer term especially in view of climate change issues.3.1

Although much of this is within the spirit of the Sorp’s requirements, this would represent a significant extra amount of work and disclosure for many charities

PIEs will be required to publish an annual Audit and Assurance Policy that describes the company’s approach to seeking assurance of its reported information, over the next three years. This would include details about how internal audit works and external audit tendering. In addition companies could be required to summarise their record on supplier payments over the previous 12 months. 3.2.7, 3.3.7

Most of this would be a completely new requirement for charities, although one would hope it is merely documenting practices that already exist. That is probably wishful thinking!

Supervision of corporate reporting

A new regulator, the Audit, Reporting and Governance Authority (ARGA), will replace the Financial Reporting Council (FRC), but with wider and different functions.  The Government plans to give ARGA a ‘regulatory principle’ relating to promoting brevity, comprehensibility and usefulness in corporate reporting to which it will have to have regard.4.4

Charity trustees may be encouraged by the reference to brevity in corporate reporting. However many of the additional disclosures required for charities arise from their unusual structures and activities, or choosing to operate as limited companies. There may therefore be limited impact on the sector.

Company directors

A proposed new regime will give ARGA powers to take civil enforcement action against PIE directors in relation to breaches of duties relating to corporate reporting and audit. The Government believes that the risk of deterring candidates from non-financial backgrounds from applying for board positions is small. Under the scheme, directors will remain subject to the same legal duties as they are now, for which they are liable to the more serious penalty of either criminal prosecution or disqualification. The regulator could look to mitigate the risk of deterring directors when exercising their enforcement powers by applying a proportionality principle, taking into account the directors’ backgrounds and considering the size and complexity of the entity concerned. 5.1.13

Directors (trustees) of charities have always been responsible for their accounts collegiately, so although in many ways this does not represent a change, trustees will be interested to see how a regulator would interpret the proportionality principle in the charity sector.

Audit purpose and scope

The purpose of the annual audit is to be redefined more broadly as: “To help establish and maintain deserved confidence in a company, in its directors and in the information for which they have responsibility to report, including the financial statements.”  The Government is therefore minded to give auditors a specific responsibility to consider relevant director conduct and wider financial or other information in reaching their judgements. 6.1.3 

This is a major change to the annual audit process, but will take some time to realise. However, it is in line with the sector regulators’ concerns over public trust and confidence in charities. It may also lead to a revision of the Independent Examination directions.

The Government further proposes to legislate to require directors of PIEs to report on the steps they have taken to prevent and detect material fraud. The Government believes this will reinforce directors’ primary responsibility for fraud prevention and detection.6.4.2

Surveys have repeatedly shown that fraud in charities runs at about the same level as in commercial companies, though with different profiles.

Audit market

The Government proposes to require ARGA to impose additional requirements on PIE audit committees in relation to the appointment and oversight of auditors. These requirements will cover the need for audit committees to continuously monitor audit quality, and consistently demand challenge and scepticism from auditors.7.1.15

Not all charities have audit committees, but these types of requirement highlight an expectation, reflected in the Governance Code, that they will be in place  - especially in larger charities.

Audit quality

PIE auditors could be obliged to share their audit plan with shareholders, consider any suggestions put forward, and then provide feedback to the audit committee on the extent to which these have been adopted. 

Shareholders may be given greater opportunity to understand the reasons for an auditor ceasing to hold office, and to question both the auditor and the company’s directors on the matters connected with those reasons. 7.3.18

The consultation does not consider the situation of guarantee companies, which are common in charities, nor how members of such a charity would liaise with the audit committee.

Regulation, and audit quality matters

ARGA is to have powers to strengthen audit firms’ governance. This would cover issues like separation of audit and non-audit services, separate financial statements, partner remuneration, and audit quality metrics. 8.2.7

Future audit quality review reports will be made public to ensure higher levels of transparency as to the performance of PIE auditors. 9.28 

Auditors will be required to report to ARGA when they have viability or other serious concerns about a PIE during the course of an audit.11.4

To resource this extra work, ARGA will be funded by a levy charged to all PIEs proportionally.

Charity audit committees will need to build some of these issues into their own assessment of their auditors. There is no current indication of a waiver of the levy for charities. Any reports to ARGA would probably also be ported as a matter of material significance to the charity regulator.


The purpose of this document is to highlight the areas of the BEIS document that will be of most interest to charities. Our comments are included to indicate the immediate relevance of a proposal to the sector. In summarising this document, and applying it the sector, we have had to be selective regarding which details to include.

The consultation process ends on 8 July 2021.