The beginning of December 2017 sees the introduction of new England & Wales Charity Commission (CC) Directions on Independent Examinations (CC32). The new Directions can be downloaded from:
Although not a radical rewrite of the previous Directions, there are some important considerations for Examiners. Here are my 10 top tips:
1. Remember the implementation date
The Directions take effect for independent examiner’s reports signed by the examiner and dated on or after 1 December 2017, not for accounting periods beginning on or after this date.
For those that use proprietary software to carry out examinations/produce reports, check that it’s been updated to produce new-style reports. At a busy time of year, software houses have only had three months to prepare and CC32 contains no fewer than twelve new example reports!!
2. Thought is needed on going concern
For examiners of accruals accounts, the new Direction 9 requires examiners to check if trustees have considered a charity’s financial circumstances when preparing the accounts.
Although this is a less onerous requirement than what was suggested in the consultation draft of CC32, which required examiners to consider the trustees’ assumptions concerning the financial sustainability of the charity, it does represent a step change from the previous Directions.
Examiners who discuss reserves policies with trustees at the start of the examination process will be best placed. Useful guidance is available in CC publications CC19 (Charity Reserves) and CC26 (Charities and Risk Management)
3. Don’t be afraid to blow the whistle!
The new Directions coincide with the introduction of revised statutory rules on ‘reporting matters of material significance’ to the Regulator (whistleblowing).
Examiners are specifically required to report where, during an audit/independent examination, there is evidence suggesting that conflicts of interest have not been managed by the trustees in accordance with guidance issued by CC and/or related party transactions have not been fully disclosed in all respects as required by the SORP.
CC’s casework is partly driven by insights provided by examiners and auditors, which is why – in part – the rules in this area have been beefed up.
Guidance has also been recently published on issues that UK charity regulators would like practitioners to report on, despite there not being a legal obligation. This can be downloaded from:
4. SORP awareness is crucial
Direction 10 requires examiners to check the form and content of the accounts. Because SORP FRS 102 is very onerous for smaller charities, this is no mean feat for the examiner.
Even if proprietary software is used to produce the accounts, be willing to invest time in using a checklist. Also consider using CC17 (Accruals Accounts Pack) as a point of reference. This provides a realistic benchmark as to what CC would expect to see in a set of accruals accounts for a small charity with income < £500K.
For small unincorporated charities and CIOs, receipts and payments accounts (although not universally popular) might be the way to go. From a disclosure point of view, they’re infinitely more straightforward.
5. Independent examiners must be independent!
The most common questions that get asked on charities update courses about independent examination tend to concern independence! Although examiners are not governed by the FRC’s Ethical Standard for Auditors, there are some golden rules:
- An examiner cannot have a close connection with the trustees or those involved with the finances of the charity. However, a close connection with charity itself need not prohibit someone acting as examiner (e.g. a member of a church congregation or choir) being the church’s examiner.
- If you are partner in an accounting firm, avoid being the examiner of a charity of which one of your fellow-partners is a trustee. Professional accountancy bodies have fined members for this!
- It is possible for an accountancy practice to do accounts preparation work for a charity of which it is the examiner. Consider safeguards to mitigate a self-review threat though, as you might do for an audit.
6. Don’t do an audit!
Fastidious examiners often ended up vouching every transaction in the charity’s books to source documentation. This isn’t strictly required as you’re only giving ‘negative assurance’. If you’re doing more than is strictly needed because the charity’s trustees have asked you to, think carefully about whether the fee you are charging remunerates you for any additional work you’ve performed.
7. Check related party transaction wording carefully
For charities that are complying with SORP FRS 102, related party transaction disclosures are onerous. The SORP makes very clear that such transactions are always material and in addition – unlike FRS 102 itself – it requires disclosure of the names of parties to related party transactions.
This will lead charities to disclose, for example, remuneration paid to a trustee’s family member even if they are paid a low wage for the work they do. To ensure these transactions are identified for disclosure, it is worth asking trustees (and other members of key management) at an early stage of the examination process if they have close family members who work for the charity.
This disclosure would not, of course, be required if a charity were preparing accounts on a receipts and payments basis.
8. Help is at hand for group examiners
Since March 2015 group accounts have only been required for England & Wales charities with total income in excess of £1M. As a result, we come across quite a few charities that voluntarily prepare consolidated accounts to show the position and performance of the entire group.
Helpful guidance in the revised Directions now allows these consolidated accounts to be independently examined where the group is below the threshold for audit.
9. Take care with report wording
This point applies especially to examiners of unincorporated charities and Charitable Incorporated Organisations (CIOs). These charities are governed by the Charities Accounts and Reports Regulations 2008, which have still not been updated to reflect the fact that SORP FRS 102 is in place. As a result, ‘true and fair override’ disclosures are still needed in the financial statements and the independent examiner’s report. See CC15d (Charity Reporting and Accounting: The Essentials) for more details.
Please note – contrary to common misconception – that this does NOT mean that unincorporated charities should still use SORP 2005!
10. Be geographically aware!
We understand that because the CC guidance has been made under specific provisions in law not in force in Scotland, the new directions do not apply there.
The Office for the Scottish Charity Regulator (OSCR) encourages examiners north of the border to take the new Directions into account as a matter of good practice, but the guidance currently on OSCR’s website remains the definitive document for Scotland.