Two new matters of material significance that auditors should report to charity regulators have been included in new guidance published today by the Charity Commission, the Office of the Scottish Charity Regulator and the Charity Commission for Northern Ireland.
But a proposal for auditors to report charities that do not follow their recommendations, introduced in the wake of the Kids Company affair, has been dropped from the final guidance,the regulators have confirmed.
The list of matters of material significance covers issues that auditors working in the charity sector are obliged to report to the relevant regulator. There were previously eight matters of material significance that had to be reported to a regulator, including evidence of dishonesty or fraud, loss of funds, money laundering, and criminal activity and terrorism.
The three regulators began a consultation almost a year ago proposing three new additions to the list of matters of material significance, and removing one existing matter.
Only two of the three proposed additions have been included in the final guidance.
The two new areas that have been added to the guidance are if an auditor has concerns about a charity’s accounts and issues a modified audit opinion report or qualified independent examiner’s report; and where an auditor has concerns that conflicts of interest have not been properly managed or declared.
The third proposed matter, which was dropped, covered instances where management letters, which often highlight areas of weakness in financial controls or governance, are issued by auditors but ignored by trustees.
A report on the collapse of Kids Company by the Public Administration and Constitutional Affairs Committee’s recommended clearer guidance on when auditors should report concerns about charity finances to the relevant regulator.
A consultation feedback report issued by the regulators says the proposal was dropped because auditors were concerned that they would be "expected to report matters which they were providing to assist clients with best practice rather than due to a legal requirement".
A previous requirement to report any notification or matter reported to the trustees on resigning as independent examiner or auditor has been removed from the list of matters of material significance, because some auditors and independent examiners were using it to report where they had ceased to hold office.
Nigel Davies, head of accountancy services at the Charity Commission, said: "Auditors and examiners play a vital role in supporting us to carry out our regulatory functions. We have, as regulators, reflected on our experiences to date and it is clear that not all auditors and examiners have been reporting matters to us. We hope that an updated list will allow auditors and examiners to be clearer in their duties."
Laura Anderson, head of professional advice and intelligence at the OSCR, said: "We have been greatly encouraged by the level of feedback we have received through our consultation, which has allowed us to refine the list, ensuring it meets both the needs of the regulators as well as examiners and auditors."
Myles McKeown, head of compliance and enquiries at the CCNI, said: "As a relatively new regulator, we feel the list of matters of material significance will be of great assistance to auditors and examiners in our jurisdiction."