Auditors are increasingly being asked to "police the charity sector" and proposals to expand what they have to report to charity regulators could harm the relationship between charities and their auditors, responses to a consultation have claimed.
In May 2016, the Charity Commission, the Office of the Scottish Charity Regulator and the Charity Commission for Northern Ireland jointly launched a consultation on the eight existing matters of material significance, which cover the issues auditors are obliged to report to the relevant charity regulator.
The consultation, which closed on Sunday, proposed adding three new matters of material significance: when management letters by auditors highlighting areas of weakness in financial controls or governance at a charity are not acted upon; that conflicts of interest have not been managed by the trustees in accordance with charity regulator guidance and/or that related part-transactions have not been fully disclosed; and that issues identified in an audit or examiner’s report are highlighted separately to the appropriate charity regulator.
But a response from the Charity Finance Group says that, though the consultation is welcome, two of the new additions to the matters of material significance – about management letters and conflicts of interest – should not be included.
The CFG response says it has "concerns that auditors are increasingly being asked to police the charity sector" and that the Charity Commission should provide greater support and training for charities to "increase standards of compliance".
The response also warns about the reforms’ adverse effect on auditors and their relationship with charities, and said it could place a "disproportionate burden" on independent examiners.
"There is a significant risk that the increasing reporting requirements for auditors would be detrimental to building a more financially resilient sector," the response says.
"Auditors would take a step back from working with their clients for fear of the regulatory consequences greatly reducing the avenues through which charities, especially small charities, can receive support.
"A central area of concern is the potential impact that these recommended reporting requirements could have on the relationship between auditors and their clients," it says. "Trustees and charities rely on open conversations where their auditor will recommend good practice. With an increased reporting obligation for auditors, these open conversations might cease to exist."
In a separate response to the consultation, the accounting firm RSM UK also warns against introducing the same two matters of material significance, especially regarding management letters.
Its response says: "The need to report all matters which have been communicated but not acted upon may discourage auditors and independent examiners from highlighting weaknesses which may not be considered significant, but which nevertheless the charity may want to address."
RSM’s response also says that expecting auditors to form opinions on how relationships are managed in accordance with charity law "is hugely onerous".
The consultation page on the Charity Commission’s website says the regulators are analysing the feedback to the consultation and will respond soon.