Is it right to ask auditors to 'police' the charity sector?

Some fear new proposals will harm the relationship between auditor and charity, reports Liam Kay

In May, the Charity Commission and its Scottish and Northern Irish counterparts launched a consultation that proposed three new matters of material significance - the issues auditors have to report to the charity regulator.

The changes were, in part, prompted by the collapse of Kids Company and concerns about how its financial problems were reported and managed.

The new matters include: instances when management letters, which often highlight weaknesses in financial controls or governance, are not acted upon by trustees; where 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 where issues identified in an audit or examiner's report are highlighted separately to the appropriate charity regulator. The consultation closed on 11 September.

But the Charity Finance Group warned in its response that asking auditors to police the charity sector could have an adverse effect on the auditor/charity relationship.

So how might the auditor/finance team relationship be affected? Subarna Banerjee, a partner at the auditing firm UHY Hacker Young, says there is a risk that relationship will be tarnished. "I think the relationship might become more adversarial," he says. "If we raise an internal control point that we think is perfectly valid, the trustees might disagree with us robustly because they don't want to be reported to the regulator the following year if they haven't implemented it."

Nick Sladden, national head of charities at the accountancy firm RSM UK, says that auditors need to have a good relationship with finance teams, but also act as the "eyes and ears" of trustees, to whom the audit report is ultimately submitted. He says having to report cases in which management letters are not acted upon could mean auditors are wary about what information to include in the letters in the first place.

"This wouldn't be a good thing because you might end up restricting advice to issues that concern the regulator rather than wider issues that are relevant to the charity," Sladden says. "I think you would lose something from the audit process."

Charles Tait, head of finance at the grant-making charity the Wolfson Foundation, says he does not believe the proposals will damage the relationship between auditors and charities, but auditors should be trusted to make professional decisions on what and what not to report. "People rely on an auditor's judgement, and I think if you chip away at that by making their regulatory requirements tougher, audit fees become astronomically expensive in the future and an audit becomes more and more automatic," he says. "I think there is a lot of value in the fact it is not an automatic process - it is a process of professional opinion."

Nick Brooks, a partner at Kingston Smith, says it is good the list of matters of material significance is being updated, but because management letters are advisory and sometimes cover issues that would not normally be classified as matters of material significance, it is important the Charity Commission clarifies what it wants auditors to report.

"It's all very well asking for us to report, but we would like to know whether the Charity Commission will put them all on file and what it will do with them," Brooks says. "I think some context from the Charity Commission in relation to what exactly it means, what it wants and what exactly it is are going to do with it is key."

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