Charities that don't follow auditors' recommendations could be reported to regulators

Consultation proposes additions to list of matters of material significance that can be reported to the Charity Commission and other charity regulators

Charities that fail to follow recommendations in auditors’ management letters could be reported to the UK charity regulators, a new consultation has proposed.

The Charity Commission, the Office of the Scottish Charity Regulator and the Charity Commission for Northern Ireland have launched a consultation on three new additions to the list of matters of material significance, which covers the issues auditors are obliged to report to the relevant charity regulator.

There are currently eight matters of material significance that have to be reported to the regulator, including evidence of dishonesty or fraud, loss of funds, money laundering, and criminal activity and terrorism.

The new consultation proposes three new matters of material significance and removes one existing matter.

Among the new additions is a proposal to report "evidence that, without reasonable cause, trustees have not taken action on matters identified by the auditor or examiner in their scrutiny of accounts for a previous year".

This covers instances in which management letters, which often highlight areas of weakness in financial controls or governance, are issued by auditors and trustees fail to act upon their recommendations.

The proposal comes in the wake of a report by the Public Administration and Constitutional Affairs Committee on the collapse of Kids Company, which recommended issuing clearer guidance on when auditors should report concerns about a charity’s finances to the commission.

The new consultation also suggests ensuring issues identified in an audit or examiner’s report are separately highlighted to the regulator so timely action can be taken.

Reporting evidence that conflicts of interest have not been managed by the trustees in accordance with charity regulator guidance and/or if related party transactions have not been fully disclosed according to the Statement of Recommended Practice are also included in the consultation.

A previous requirement to report any notification or matter reported to the trustees on resigning as independent examiner or auditor has been removed, with the consultation explaining that this rule was misinterpreted and auditors and examiners were simply telling the commission they had ceased to work for a charity.

Nigel Davies, head of accountancy services at the Charity Commission, said: "With the recent debate about auditors’ reporting duties in the light of the report by the PACAC on the collapse of Kids Company, this consultation provides an opportunity to explore what extra areas of reporting are necessary to assist in our taking timely regulatory action and to help underpin public trust and confidence."

Andrew O’Brien, head of policy and engagement at the Charity Finance Group, said greater clarity on how the commission would use greater reporting was needed.

"Changing the wording needs to go alongside greater clarity from the Charity Commission about the kind of issues that mark out charities as being regulatory risks," he said.

"There is also a danger, given the significant cuts in the commission’s budget, that it will not be in a position to use and act upon the information it receives. It would be good for the commission to outline how it is going to use greater reporting to support its risk-based approach to regulation, so that all stakeholders understand the value of the changes."

The consultation runs until 11 September.

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