More charities can now opt out of audits - but is it wise?

The rise in the audit threshold removes the requirement for 4,000 more charities, writes Sam Burne James

In December, the Cabinet Office began consulting on a proposal to raise the audit threshold for charities in England and Wales. This was duly adopted and came into force on 31 March.

Previously, all charities with incomes of more than £500,000 had to have their accounts audited by a statutory auditor. This threshold has now doubled to £1m, freeing up a further 4,000 charities to have an independent examination of their accounts rather than the full audit, although charities with incomes of more than £250,000 must still have their accounts audited if they have total assets of more than £3.26m. Scotland was not affected by the change – its threshold remains £500,000 – and nor was Northern Ireland, where the threshold will be £500,000 once its nascent regulatory regime kicks in fully.

The Cabinet Office estimates that independent examination costs an average of £2,500 for charities with incomes of between £500,000 and £1m, compared with a conservative estimate of £4,750 for audits, although fees can vary. Attractive though such cost and bureaucracy savings are, charities are not obliged to dispense with audits and financial experts advise that they think carefully about what is best for them.

William Reid, head of charities at the investment firm Quilter Cheviot, says he is concerned by the move. "Annual auditing means that financial pressure points and anomalies are more likely to be identified in good time," he says, adding that the change "seems to give credence to the idea that financial housekeeping is somehow a burden on charities".

Reid echoes concerns raised by others that many grant-makers, banks and public sector commissioners will require an audit as part of their awards process. "The fact that smaller charities will, for the most part, no longer have this tool in their armoury, ready to go, could place them at a disadvantage," he says. A director at one infrastructure body in the north west of England told Third Sector it would be likely to retain its audit in order to keep its council funder happy. This person preferred not to be named because the decision was yet to be confirmed by the board.

Nick Brooks, head of charities at the accountancy firm Kingston Smith, is less concerned about this effect. "One bank I spoke to said 'normally we follow what the law says – if the law says you don't need an audit, we say you don't need an audit'," he says. "My guess is that funders will follow suit." A spokesman for the Association of Charitable Foundations says there is no indication its members will ask for audited accounts other than from those charities above the threshold.

Brooks says audits might be retained in cases where charities know there is a possibility their incomes will exceed the threshold in the near future, where governing documents stipulate that a charity must have its accounts audited or because trustees value the extra reassurance it gives above independent examination.

Michael Brougham, a trustee of the Association of Charity Independent Examiners, is keen to make it clear that independent examination is not a soft alternative to audit, citing the Charity Commission's CC32 guidelines on what independent examination must include and the fact that independent examination of charities with incomes of more than £250,000 can be done only by individuals with certain accounting qualifications. "If independent examination is done properly, the chance of something serious slipping through unnoticed is very low," he says.

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