AUDITING: Audit Levels

Gideon Burrows

Nevertheless, the introduction of choice has been welcomed by the sector's charity finance chiefs, and even large organisations do not feel that their smaller counterparts are getting off lightly.

"We don't expect the change to undermine public confidence in charities," says David Sinclair, head of public affairs at the Charity Finance Director's Group (CFDG). "The vast majority of our members were in favour of this.

There's a perception in the sector that £250,000 is not a lot of money, so to increase the threshold to £1 million is the right level."

Significantly, CFDG, itself a charity, will be affected by the change.

It has an income of about £400,000 a year.

"We have been having audits, but we may soon be in the position to choose not to. That's an issue for the trustees to discuss," is all that Sinclair will say.


The International Glaucoma Association is a membership organisation which aims to raise awareness about glaucoma, the leading cause of preventable blindness in the UK, and to improve services for glaucoma patients in the UK and around the world.

The organisation has an annual income fluctuating between £750,000 and £1.3 million, and it pays a small firm of accountants, Larkins of Canterbury, around £8,000 a year to audit the accounts.

The auditors come to visit four times a year, when the organisation's records are made fully available. They are allocated their own desk and David Wright, the charity's chief executive, and Tom Berry, the finance officer, make themselves available to answer any questions. Once a year they look over the charity's stocks and assets, to make sure that they are properly accounted for.

The audit has been useful for the charity in the past. The auditors managed to identify that some members' subscriptions were being paid into an old bank account, and wrongly allocated by the charity. That could have led to memberships being wrongly classified as expired. Another time they discovered that some members were paying subscription rates that were years out of date.

Both Wright and Berry are firm believers in external auditing, and see it as a vital reassurance for their donors and the public.

"The audit is one of the greatest protections the public has that the charity is fulfilling its proper aims and objectives," said Berry. "We ask the public to give us money to change things, so we have to show the public we spend their money wisely. That's what the auditor does."


- Select an auditor that specialises in the charity sector or has lots of experience with charity accounts.

- Do a tendering exercise to get the cheapest and most suitable deal.

- Do a 'cost versus comfort' analysis. Do you need to have a full audit for the amount of comfort the organisation requires, or will a cheaper independent examination be sufficient?

- Plan in good time. Avoid delays by making sure the accounts are ready when the auditor comes.

- Establish boundaries for who is doing what. Is the charity preparing the accounts, or will the auditor do that?

- Talk to the auditors throughout the year. Don't save all your questions for the few days they come in.

- Auditors will rarely just offer advice, but if you ask you may get it for free or as part of the package.

- Try to insist on using the same auditing staff each year so their knowledge of the organisation can build up, giving you added value.

- Consider inviting the auditor to a trustee's meeting to respond to any queries they might have.

- Many small and local firms will do pro-bono work for charities because they like to have charities on the books.

Charities earning less than £250,000 a year currently do not have to be professionally audited. That limit could soon rise to £1 million, but are smaller charities wise to have an audit done anyway?

If there is one criticism that is levelled against this government across the business, public and voluntary sectors, it is that New Labour is obsessed with targets and auditing, and is more interested in red tape than results and substance.

In the voluntary sector, this may be true at the delivery end where charities and community groups are providing public services sometimes to strict government contracts, but in the charity finance world the Government is proposing to relax monitoring rules, not tighten them up.

In its strategy unit report on the future of the voluntary sector, Private Action, Public Benefit, the Government proposes the introduction of a 'magic million' mark, below which charities will not have to have their accounts professionally audited. Currently, those earning over £250,000 have to have an audit, which can be burdensome and expensive for small organisations with limited funds and staff.

"These rules are unnecessarily complicated and impose a professional audit requirement at too low a level," says the report. "The charity threshold should be raised to £1 million."

Any organisation not earning the magic million, but with an income over £10,000 a year, will still have to bring in a 'competent independent person' to check the accounts against standards set by the Charity Commission.

The idea is to free up the smallest charities from expensive audits which could hold back their opportunity to grow or develop and, perhaps from the Government's perspective, prevent them from becoming service providers to local government contracts.

Certainly, the external audit can be costly. Murtaza Jessa, charities partner at accountants Trustient, estimates that charities earning between £250,000 and £1 million would pay around £4,000 for a full audit. The same charities would pay only £1,200 for an independent examination, the professional version of the 'competent independent person' required in the government proposal.

Both options provide a degree of public accountability to donors, grant givers and other stakeholders, as well as comfort for trustees wanting a professional overview of the charity's affairs. So shouldn't small charities opt for the cheaper option, if and when they become free to do so?

Gareth Morgan, general secretary of the Association of Charity Independent Examiners, thinks they should.

"Independent examinations, if done properly, are actually quite thorough," he says. "In some cases they are doing more than many auditors would do for charities of that size."

He points out that independent examiners are obliged to inspect charities' accounts according to strict guidelines, laid down by the Government and the charities commission, including checking that the figures tally up with the charity's records, and that the organisation is complying with charity law.

"These days, independent examinations are much more organised and requirements are laid down by statute," says Morgan. "It's much more strict than the informal audit of the past. In practice, the only thing the independent examination leaves out is that we are not obliged to state that the accounts are a true and fair view of the charity's affairs."

The Association offers a qualification for examiners, although legally only a competence in charity accountancy is required to do the job.

Selby Council for Voluntary Service is one organisation that will welcome the change. Its income rose over £250,000 last year, and it was disappointed to have to spend money on a full audit when an independent examination had always been sufficient. If the proposal is adopted, it won't have to change its practice.

But despite the cheaper option, many charities affected by the proposed change, and charity accountants, expect most charities to continue with full external audits, even though they don't have to.

"For more and more charities, even those below the current £250,000 threshold, the trustees are requiring independent audits be done," says Jessa. He adds that nine out of 10 of his clients are sticking with the audit, and disagrees that an independent examination is sufficient.

"The audit requires more extensive examination and looks at the systems and controls, like approving invoices and cash collection, while the independent examination is restricted to making sure the accounts agree with the records," he says.

Aside from the added practical benefits of an external audit, such as ongoing advice during the year and a management letter to trustees pointing out any problems, many in the sector believe there are knock-on benefits from paying for the full service. Charities, they say, should not want to pass them up. One major reason is the public trust which charities, large and small, enjoy when their accounts are externally examined and certified.

The National Heart Research Fund is one charity that will be affected by the proposed threshold change if it is passed into charity law. It has an annual income of just over £800,000 a year. Trustees there decided a few months ago to continue their professional audit even if the rules change.

"It gives people a better feeling about the charity if they've seen a set of accounts that have been audited," says Michael Clark, finance officer at the charity. "It's a comfort for trustees and for external people, as well as for grant givers and other organisations."

The income of the Wessex Cancer Trust has fluctuated over the 'magic million' in the past two years, which is one reason why the Trust has decided to continue with its external audit, even if the rules are changed.

But Carolyn Vitoria, accounts consultant at the Trust, says the charity believes firmly in the external audit as an extra check for the public.

"It makes sure the right controls are there, and gives us confidence," she says. "If it weren't there, the public wouldn't view our accounts in the same way."

In the very smallest charities, trustees can often be quite hands-on because they may have only one or two staff. Trustee help is needed with the day-to-day running of the organisation: for them an external audit could be an extravagance.

"It may be that trustees are clued up and can make time to work closely, so don't feel an extra layer is needed," says Jessa of Trustient.

For larger charities, such as those earning over £250,000 a year, the trustees will be more distant. The audit can give them a good view of what is going on.

"Trustees appreciate the audit," adds Vitoria. "Once a year the report gives them the knowledge that someone independent is having a good view of the organisation."

For Kate Sayer, partner at charity accountants Sayer Vincent, reporting to the trustees is one of the main benefits the independent audit can bring.

"The audit is a way for trustees to have someone independent looking at what the charity is doing and bringing to their attention things that need to be dealt with," she says.

She adds that the independent audit adds credibility to the accounts, which can be useful when organisations are applying for funding from government or independent grant-making trusts.

The point is not just that some grant makers require charities to audit their accounts in order to qualify for cash, but that funders are more likely to make awards to charities which appear official in their financial dealings. Having professionally presented and certified accounts goes a long way towards that.

"Many charities are likely to be in the position that they would like the added credibility of having their accounts audited, if they are asking grant makers and trusts for funds," says Sayer. "The other thing is that the audit is more valuable to charity commissioners, and corporate and business partners."

However, two grant-making trusts Third Sector spoke to both say fully audited accounts are not central to their selection procedures for grant making.

Stephen Masson, head of finance at the Diana Princess of Wales Memorial Fund, agrees that audited accounts do give charities a "clean bill of health" which is appealing to grant makers, and makes them more likely to fund them. But he says his fund has tried to be open with its requirements.

"Because we're small, we are able to be flexible," he says. "We do have organisations that come to us without years of accounts, if they are new or are local arms of foreign charities. Our first focus would be on what are they doing, and whether that fulfils our requirements for what we want to fund."

The City Parochial Fund, one of the biggest independent grant makers to small charities, says it does not expect charities to adhere to accounting practices any stricter than the law demands.

"For us to impose a limit over the state requirement would put us outside of the received view," says Carol Harrison, finance director at the fund.

"If people are concerned that the threshold is too high, they should feed that into the government department that's taking the proposal forward.

We'd do better to get a figure centrally, rather than setting our own requirements," she added.

The key to the Government's proposals is to introduce extra flexibility for the smallest charities: they can choose an external audit, or to go for a cheaper, less formal option. Anecdotally at least, many charities will choose to maintain the status quo if the changes are brought in.

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