Don Bawtree: Is it time to reveal charity audit reports?

Trustees must learn from Tesco's recent accounting error and ensure they understand financial risk areas, writes our columnist

Don Bawtree
Don Bawtree

In the flood of comment on and analysis of the recent news about the supermarket chain Tesco and its accounting disclosures, there is at least one point that is just as applicable to charities as it is to commercial organisations.

A number of commentators picked up on the interaction between the auditors and the company. To comply with the new requirements of the UK Corporate Governance Code, the audit committee report sets out its wider scope and its consideration of significant issues in relation to the financial statements.

One paragraph in the report reads: "The committee notes that commercial income was an area of focus for the external auditors based on their assessment of gross risks. It is the committee's view that while commercial income is a significant income for the group and involves an element of judgement, management operates an appropriate control environment that minimises risks in this area. As a result, the committee does not consider that this is a significant issue for disclosure in this report."

The audit report itself is not the sort that you currently see in any charities, although in theory you might. A company complying in full with the corporate code is subject to a more comprehensive audit report, running to several pages, setting out in detail how the audit was conducted and how issues were addressed. In the Tesco report, the auditors set out that "commercial income (promotional monies, discounts and rebates receivable from suppliers) recognised during the year is material to the income statement and amounts accrued at the year-end are judgemental".

These disclosures throw a helpful light on the role of the audit committee and the auditors. It is a process and interaction that occurs in any charity that is subject to external scrutiny, whether it be through an audit or an examination. And it is a stark reminder for trustees to take this interaction seriously and ensure that matters are being dealt with properly.

Auditors and – usually – examiners will discuss with their clients where the risks of misstatement lie. For larger charities, these will be presented in a report to the trustees or a committee, who should consider it and actively challenge the auditors on their understanding of the risks. The process is supposed to be mutually beneficial, to ensure that the auditors really are focusing on what matters. After the accounts are finished and ready for signing, the auditors come back and explain what they have done and found. In the world of charities, this takes place in private with the trustees. As we have seen above, in the corporate world this report is in effect made public with the accounts. And at this stage the trustees should again be engaging with the auditors and challenging them on the audit findings, so that both parties have confidence in the accounts and the auditor's conclusions.

It is a salutary lesson to see this dialogue played out in public, and the effectiveness of the process will no doubt be one of the learning points in due course. Meanwhile, it is an issue for all boards to reflect on: boards need to engage with their auditors; both need to make sure they understand the financial risk areas; and both need to be content that they are being properly addressed.

At present this process is not open to public view – but I wonder whether, for some charities, it is only a matter of time before it is disclosed voluntarily or because of regulation.

Don Bawtree is lead partner for charities at accountants BDO LLP

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