New law set to increase scrutiny

Up to 4,000 charitable companies could face extra accounting scrutiny if plans included in the Company Law Reform Bill go ahead.

The plans are designed to standardise the accounting scrutiny system for incorporated and unincorporated charities by bringing charitable companies under charity rather than company law.

Under the rules as they currently stand, unincorporated charities with annual incomes of between £10,000 and £250,000 must undergo an independent examination, which does not have to be performed by a qualified practising accountant. Charitable companies, meanwhile, need a reporting accountant's report if their gross income is greater than £90,000. Both need an audit report if they have an annual income above £250,000.

If the Bill goes ahead, charitable companies with incomes between £10,000 and £90,000, which under company law do not need their accounts scrutinised, would face independent examinations under charity law.

Greyham Dawes, director of the charities and education unit at Horwath Clark Whitehill, estimates that between 3,000 and 4,000 organisations will be affected.

"The Government is aware of this and is worried about people saying it is creating an extra burden," he said. "It has promised a consultation to review the £10,000 threshold once the Charities Bill has become law."

The move is expected to improve regulation because, unlike the reporting accountant's report, the independent examination is tailored to charities' needs.

"It will be more use to the Charity Commission than the reporting accountant's report ever has been," said Dawes. "Under the regime of the reporting accountant's report, there is no duty to comment on whether the proper accounting records have been kept. The independent examiner will have to say if proper records have not been kept."

Dawes added: "Charitable companies will have to make sure their accounting records are 'proper'. Most won't have a problem, but when you're a small organisation relying on volunteers, one of the disadvantages is that you might not have the best records."

The proposals have been broadly welcomed. Nick Brooks, head of the not-for-profit sector group at Kingston Smith chartered accountants, said: "It makes sense for the system to be the same. At the moment there is no scrutiny at all for those charitable companies with incomes below £90,000."

Ray Jones, head of accountancy policy at the Charity Commission, said: "This is good news for the sector. Having a report that reflects the needs of charities would be excellent."

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