The Charity Commission has released several reports based on a review of the quality of charity accounts and their audit or examination.
The results are truly shocking, with about 45 per cent (135 out of 296) failing to meet their new benchmark test. This is made up of 15 criteria, none of which is especially challenging.
They range from "is there an annual report?" to "do the accounts balance?" and only slightly more sophisticated questions about income and expenditure accounts and the quality of reporting related-party transactions. Further analysis looked at trustee remuneration, expenses and other transactions.
The overall failure rate is, perhaps unsurprisingly, highest among smaller charities. The commission also notes that qualified independent examiners perform better than those who are not members of a recognised accountancy body.
In a sign of its increasingly tough approach, the commission has been in touch with the relevant bodies, which appear to not be pleased with the performance of their members. Trustees, auditors and examiners are all being put on notice to raise their game.
About 33 accountancy firms produce annual transparency reports, or the equivalent, which set out the firms’ approach to managing and enhancing audit quality. This is mandatory for firms with quoted clients.
Sadly the Financial Reporting Council has concluded that hardly anyone has heard of them and, when they have been read, they are said to be long and boring.
Notwithstanding that, treasurers and audit chairs in charities should be asking their auditors whether they produce such reports and see what they say.
The FRC then wants auditors to be quizzed about client gains and losses, staff turnover and the handling of conflicts of interest.
The FRC has written to chairs of audit committees and finance directors in the run-up to Brexit. It makes the following points of generic importance to all businesses, including charities.
First, ask employees to check if they need to apply to the EU Settlement Scheme.
Second, check whether the organisation faces additional legal, regulatory and/or administrative barriers as a result of the UK becoming a "third country" in the event of a no-deal EU exit.
Third, ensure your suppliers and customers have considered the impact of and are prepared for the UK’s exit from the EU, and engage with your local chambers of commerce or business adviser and attend a Brexit Business Readiness event.
In corporate reporting in preparation for exiting the EU, organisations should distinguish specific risks from the broader economic uncertainties relating to Brexit.
The FRC has also produced a report looking at "disclosures on the sources and use of cash" in accounts. Its focus is on investor’s interest, but many of the same drivers operate in charities.
Given the Charity Commission’s concerns about the transparency of reserve reporting, there might be lessons to learn from this project. People apparently simply want to know where the money comes from, where it goes and the related risks and restrictions.
All of which might be relevant to the next Statement of Recommended Practice, which will be produced under new arrangements after the recent review of the Sorp’s governance.
The committee is being overhauled to bring a different mix and seven stakeholder groups are being established to make sure there is a good balance of technical and sector understanding.
Meanwhile, those hoping that Brexit will bring an end to the Sorp will be disappointed to hear that the House of Lords has approved draft legislation retaining EU accounting and audit law for after the UK leaves the EU. It is unclear when that legislation will be required.
This article was first published on 2 October in Third Sector Magazine.