The Regulator for Charities in England and Wales

Independent Examination of Charity Accounts

Directions and guidance

Contents

Introduction: how to use this guidance

To maintain public confidence in the work of charities, charity law requires that most charities have a form of external scrutiny of their accounts.  For the majority of charities this scrutiny will be an independent examination rather than an audit.

An independent examination is a simpler form of scrutiny than an audit but it still provides trustees, beneficiaries, stakeholders and the public with a reasonable degree of assurance that the affairs of the charity are in order.

Whilst in most cases the examiner will not need to be a qualified accountant to carry out a  proper independent examination, the examiner must follow the 11 Directions set out in this guidance and word their report in the way that is required by the Regulations. Inevitably there is a process to be followed and this guidance takes the examiner through those 11 Directions, their reporting duties, and provides practical advice at every stage.

To which accounting periods does this guidance apply?

This guidance has been updated for changes in the scrutiny (independent examination and audit) thresholds introduced by the Charities Act 2006 and should be applied to the examination of accounts of non-company charities and Charitable Incorporated Organisations for accounting periods beginning on or after 27 February 2007. For small company charities incorporated under company law, the independent examination thresholds apply for accounting periods ending on or after (implementation date).

Who should use this guidance?

This guidance is intended for both trustees and independent examiners, and sets out when an independent examination is required, what is involved, and how to go about appointing an independent examiner. By knowing what is involved, trustees can have their records, annual report, accounts and explanations ready to assist the independent examiner (“the examiner”) to complete his work in a timely way. Examiners, by reading this guidance, will understand the 11 Directions and their reporting duties.

This publication also sets out (Appendix 1) the points which trustees should consider when selecting an examiner and the issues the examiner should consider before accepting an appointment. Also for those charities with a gross income exceeding £250,000, Appendix 1 lists those persons who are permitted to carry out an independent examination.

Trustees and examiners are also recommended to read CC15 Charity Reporting and Accounting: The Essentials to find out about their options for preparing accounts and external scrutiny, audit and independent examination, the requirements for providing an annual report and for details of the information update or annual return to be filed with the Commission.

The role of an independent examiner is a responsible one. For most charities the examiner need not be a qualified accountant but they must have the skills and experience to carry out their independent examination correctly. Examiners are recommended to read this guidance to find out what they must do to comply with the Directions for independent examination, the content of their report, and for practical guidance about how to go about carrying out their work.

What is an independent examination?

Independent examination was introduced by Part VI of the Charities Act 1993 Act (“the 1993 Act”). An independent examination provides a limited external check on the accounts, and is a form of scrutiny which can be carried out by any person with the relevant skills or experience, except where the gross income exceeds £250,000, when only certain people may perform an examination (Appendix 1). It is a less onerous form of scrutiny than an audit and provides less assurance in terms of the depth of work which is to be carried out.

An examination involves a review of the accounting records kept by the charity and a comparison of the accounts presented with those records. It also involves a review of the accounts and the consideration of any unusual items or disclosures identified. It is important to note that verification and vouching procedures, where an item in the accounts is checked against an original document such as an invoice or a receipt, only becomes necessary where significant concerns are identified from the work of the examiner, or where satisfactory explanations cannot be obtained from the trustees.

Where a significant concern relating to a financial matter that the examiner views as material to the accounts is unresolved or other matters that must be included in the examiner’s report come to the examiner’s attention, then consideration will be needed as to how this is reported (see Direction 11). If a matter is identified where the Commission is likely to consider using its enquiry powers (refer to Appendix 5) the examiner also has to make a separate report on that matter to the Commission in addition to their examiner’s report attached to the accounts.

In their examiner’s report, the examiner is only required to provide a statement on specific matters that have come to their attention as a result of the examination procedures specified in the Directions. This is a simpler requirement than that of an audit. An auditor is required to build up a body of evidence to support a positive statement of opinion on the accounts. In particular, an auditor is required to form an opinion as to whether the accounts show a “true and fair view”.

What are the new thresholds for independent examination?

For both non-company (unincorporated) charities, and for company charities established under company law with accounting periods commencing on (date to be advised) the thresholds for independent examination are: gross income £500,000 or less, or gross assets of £2.8m or less in the financial year. (See also Appendix 2 - Calculation of gross income.)

Where gross assets exceed £2.8m, provided gross income is £100,000 or less, then charities (including Charitable Incorporated Organisations) may still elect to have an independent examination. Appendix 3 sets out in a flow chart the questions to be asked when determining whether a charity is eligible for independent examination.

Unless the charity’s governing document requires otherwise, there is no requirement for independent scrutiny where the gross income for the year in question is £10,000 or less. A statutory audit is required where gross income exceeds £500,000 and/or gross assets exceed £2.8m and gross income exceeds £100,000.

Where the gross income of the charity exceeds £250,000 and the charity is not subject to statutory audit, the 2006 Act introduced the requirement for the examiner to be a member of a specified body. The bodies are specified in the 2006 Act and are listed in the “Selection of Examiners” section of this guidance.

This guidance also applies to those small charitable companies, which are not subject to statutory audit.  Although eligible company charities may have an independent examination, their duty to maintain accounting records, and the format and contents of their accounts remain governed by company law. The guidance refers to the Companies Act 2006 where appropriate. To assist examiners who are reviewing the accounts of a company charity, Appendix 8 lists, for information, points to consider, regarding the directors’ report and the form and content of company accounts.

What is the legal framework for an independent examination?

The Charities Act 1993 (“the 1993 Act”) made provisions for Regulations governing the form and content of charity accounts, trustees’ annual reports and the duties of charity auditors and independent examiners. These requirements are set out in The Charities (Accounts and Reports) Regulations (“the 2007 Regulations”) and apply to accounting periods commencing on or after [date to be decided]. The 1993 Act provides for some form of independent scrutiny for the accounts of all but the smallest charities, but this will fall short of a full requirement for an audit for the majority of charities. This guidance sets out the procedure that should be followed by the independent examiner and advises trustees about how they should go about appointing their independent examiner.

The Charities Act 2006 (“the 2006 Act”) introduced an increased income threshold for independent examination for accounting periods beginning on or after 27 February 2007. Further changes, applying to accounting periods commencing on or after [date to be decided] extend the scope of independent examination to small company charities incorporated under company law. This guidance sets out the Directions that apply to both company and non-company charities with explanations provided for each Direction as to what is involved.

The 2006 Act places a new legal duty on independent examiners to make a written report to the Charity Commission where, during the course of their examination, they become aware of a matter which relates to the activities or affairs of the charity, or of any connected institution, or body, and they have reasonable cause to believe that the matter is likely to be material to the Commission in the exercise of its inquiry functions. This guidance explains what this legal duty is, sets out a model report, and explains how to go about making a report.

Where can I find the Regulations?

The 1993 Act and 2006 Act and the Regulations (The Charities (Accounts and Reports) Regulations 2007 - SI 2007/ref; “the 2007 Regulations”) apply to England and Wales only. The requirements of the Regulations are reflected in this publication. Copies of the Regulations and the 1993 Act and 2006 Act are available from Office of Public Sector Information. The 2007 Regulations are also available on-line at http://www.opsi.gov.uk/si/si-2005-index.htm

Other external scrutiny requirements

Having found out whether the charity’s income and assets mean that it is eligible for an independent examination, there are a number of additional points for the examiner to consider before starting their work.

The examiner must also be aware that an audit obligation may arise due to requirements outside of the 2006 Charities Act (the “2006 Act”), such as:

  • a requirement under the charity’s governing document (although if this means a higher level of scrutiny than otherwise required by the 2006 Act, the trustees may be able to amend the governing document – see Appendix 1);
  • a requirement under another statutory or regulatory regime, such as those relating to registered social landlords and NHS charities; or
  • a requirement placed on the charity by a donor or financier (eg a loan-making institution).

Trustees may also opt for an audit if they prefer the higher level of assurance that it provides.

Charities that are incorporated under the Companies Acts will have a Memorandum and Articles of Association. Company law sets out specific reporting requirements for all companies, including charitable companies. If the charity is a company then the examiner will also need to be familiar with the additional reporting requirements that apply to small companies.

Trustees of company charities are responsible for ensuring that the contents of the director’s report, which can incorporate the Trustees’ Annual Report, complies with the requirements of the Companies Act 2006.

Timely filing of the Trustees’ Annual Report, the accounts and independent examiner’s report

Where the charity’s gross income exceeds £10,000, both company and non-company charities must file their report and accounts with the Charity Commission. The trustees are responsible for ensuring that their Trustees’ Annual Report and accounts, together with the independent examiner’s report is submitted to the Commission within 10 months of the financial year-end. Trustees of small company charities should note that the filing timescale for the submission to Companies House is 9 months from the financial year-end and so they may find it convenient to file with the Commission at the same time.

The accounts and supporting information, which will also include the Trustees’ Annual Report, must therefore be submitted for independent examination early enough to allow the examiner to complete their work. Where accruals accounts are prepared, it will help the examiner to have the Trustees’ Annual Report and the accounts available before they start their work. The trustees must ensure the submission of the Trustees Annual Report, the accounts and the independent examiner’s report to the Commission is made in time.

The objective of the independent examiner is to be able to complete their examination and make their report. Their report must set out all the information which the law requires and so the examiner should follow Direction 11 when writing their report and ensure the wording is correct. The wording of the report is important because it tells the reader whether all the matters the examiner has to report on were satisfactory, and if not it sets out the examiner’s concerns.

The trustees and the independent examiner should agree about who is to send the Trustees’ Annual Report, accounts and independent examiner’s report to the Charity Commission. Whilst it is the duty of the trustees to ensure that the submission is made on time, the independent examiner should ensure they have sufficient time to undertake their work and complete their work within the timescale agreed with trustees.

Selection of examiners

Appendix 1 sets out our guidance on the selection of an independent examiner. Whilst not all examiners have to hold a professional accountancy qualification or be a member of an approved body, the trustees must always appoint a person suitable for the circumstances of the charity.

Once a charity’s gross income exceeds £250,000, the examiner must be a person who is a member of one of the approved bodies. Where the accounts are prepared on an accruals basis, in accordance with the 2007 Regulations, a commensurate understanding of accountancy principles and accounting standards will be needed. Experience of charity administration and accounting is desirable.

For charities with a gross income of £250,000 or less, it is not necessary for the examiner to be a member of an approved body, though the trustees should appoint a person suitable for the circumstances of the charity. Examiners acting for charities which are also registered in Scotland, are recommended to view the Office of the Scottish Charity Regulator (OSCR) website and should note that in all cases where accruals accounts are prepared by a charity registered with OSCR, the examiner must be a ‘qualified independent examiner’.

Where the gross income of the charity exceeds £250,000 and the charity is not subject to statutory audit, the 2006 Act requires that the independent examiner be a member of the following bodies:

  • Institute of Chartered Accountants in England and Wales;
  • Institute of Chartered Accountants of Scotland;
  • Institute of Chartered Accountants in Ireland;
  • Association of Chartered Certified Accountants;
  • Association of Authorised Public Accountants;
  • Association of Accounting Technicians;
  • Association of International Accountants;
  • Chartered Institute of Management Accountants;
  • Institute of Chartered Secretaries and Administrators;
  • A member of the Chartered Institute of Public Finance and Accountancy, or

be a Fellow of the Association of Charity Independent Examiners.

The guidance (Appendix 1) also gives consideration to the criteria of independence when selecting an examiner. The prospective examiner should also consider these guidelines prior to accepting the appointment. Where the examiner is also a member of a professional body they should ensure that the appointment does not conflict with that body’s ethical code, and where the examiner is a registered auditor, that the appointment is compatible with the Auditing Practices Board Ethical Guidance including “Ethical Standards – Provisions for Small Entities”.

It is the responsibility of the trustees to satisfy themselves that their independent examiner is appropriately experienced or qualified to undertake the independent examination. For example if accruals accounts are being prepared, is the independent examiner familiar with the principles of the Statement of Recommended Practice, the SORP? Where appropriate, the trustees may request an examiner to provide evidence of their experience, accreditation, or qualifications and this is strongly recommended in all cases where the examiner has to be a member of an approved body.

The examiner’s report

The examiner’s role is an important one and their report provides reassurance about certain specific matters and also provides the examiner with an opportunity to draw to the attention of the reader of the accounts any other matters of concern. The examiner’s report must contain all the information required by the law.

The specific reporting duties of the independent examiner are set out in Regulation 12 of the 2007 Regulations. Direction 11 reproduces the Regulations as part of the guidance given for the making of the report. Appendix 4 sets out a number of example examiner’s reports. The independent examination report for a company, incorporated under the Companies Acts, is different to that of a non-company charity because it must also take account of company law requirements

The first part of the examiner’s report confirms a number of factual matters that reassure the reader that the charity is eligible for independent examination and that the examiner has followed the Directions. In particular:

  • the name of the charity and period covered by the accounts;
  • eligibility of the charity for an independent examination as opposed to an audit;
  • that the examiner has followed the Directions;
  • the examiner’s responsibility to note if particular matters set out in the Regulations have come to their attention;
  • the basis of the examiner’s report, which helps the reader of the report to understand what the examination involved;
  • and their name and any relevant professional qualification and, if the charity’s income exceeds £250,000, the qualification they hold which enables them to act as the examiner.

The second part confirms that those specified matters that the examiner must satisfy themselves about are satisfactory. In particular the examiner confirms that nothing has come to their attention which indicates that:

  • proper accounting records have not been kept, or in the case of a charitable company that adequate accounting records have not been kept ;
  • the accounts do not accord with such records; or
  • where accounts are prepared on an accruals basis they fail to comply with relevant requirements under the Regulations and/ or are not consistent with the Statement of Recommended Practice; and
  • any matter which the examiner believes should be drawn to the attention of the reader to gain a proper understanding of the accounts.

Examples of matters that the examiner may wish to draw to the reader’s attention include:

  • material expenditure or action contrary to the trusts of the charity;
  • failure by trustees to provide information and explanations to which the examiner is entitled; or
  • evidence that accounts prepared on an accruals basis are materially inconsistent with the trustees’ annual report; and
  • where the examiner is a registered auditor whether they have been responsible in drawing up the accounts from the ‘trial balance’.

Also where an independent examination has been approved by the Commission, using its powers under the 2007 Regulations, the examiner should advise that the examination is in substitution for an audit.

The examiner’s report must be signed by the examiner in his or her own name. Whilst the name of a partnership or company may be added, the appointment of an examiner relates to the individual rather than the partnership or company. Where an electronic submission is made to the Commission, the electronic copy may be an image of the original or be a copy with a typed signature.

Where a charity registered in England and Wales is also registered with the Office of the Scottish Charity Regulator, the charity trustees should ensure that the receipts and payments, or accruals accounts, and the Trustees’ Annual Report, comply with the requirements of both jurisdictions. The examiner may make a combined report that satisfies the regulatory requirement of both jurisdictions regarding those accounts, and examples of such a report are given in Appendix 4.

It should be noted that receipts and payments accounts set out in the format required by the Regulations in Scotland are accepted in England and Wales. Unlike Scotland, there is no set format or layout for receipts and payments accounts and there are no corresponding Regulations in England and Wales, aside from the requirement that the receipts and payments accounts include a Statement of Assets and Liabilities.

Charity Commission Directions

The Charity Commission’s Directions provide the procedural basis or framework to define how the reporting duties of the examiner must be met. There are 11 specific Directions that the examiner must address in carrying out an examination. In addition, the examiner should consider if matters have come to their attention which give rise to a legal duty to report to the Commission. Seven of the Directions apply to all accounts and four apply only where accounts are prepared on an accruals basis under section 42(1) of the 1993 Act.

Direction

Applicable to receipts and payments

Applicable to accruals accounts

Applicable to
company charities

1. Examination and accounting thresholds

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2. Understanding the charity

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3. Documentation

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4. Comparison with accounting records

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5. Accounting records

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6. Analytical procedures

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7. Form and contents of accounts

 

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8. Accounting policies, estimates and judgments

 

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9. Events subsequent to the year end

 

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10. Trustees’ annual report

 

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11. Examiner’s report

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Legal duty to report certain matters of material significance to the Charity Commission (refer to Appendix 5).

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Although only examiners of accounts prepared on an accruals basis are required to review the Trustees’ Annual Report for consistency with the accounts, examiners of receipts and payments accounts may still find the trustees’ annual report helpful in undertaking their examination.

Resources to assist trustees, the preparers of accounts and the independent examiner

The Commission has a number of publications, freely available via our web site designed to assist in the preparation of accounts consistent with the 2007 Regulations.

The following publications may be of particular help:

The Receipts and Payments Pack   CC16
The Accruals Pack CC17
The Statement of Recommended Practice 2005
Model Example Trustees’ Annual Reports and Accounts   (web site only)
Internal Financial Controls for Charities CC8

It is necessary that independent examiners acting for charities preparing accruals accounts are conversant with the SORP.

Set out below are:

  • an explanation of the objective of each of the 11 Directions;
  • a explanation of the circumstances which give rise to a legal duty to make a report to the Commission; and
  • guidance on operational procedures and methods which will help examiners to meet the requirements of the Directions.

The Directions (which must be followed) are reproduced in bold print at the head of each page to which they refer, with explanatory guidance set out in light print below. As with any guidance, the examples given and procedures suggested cannot meet all circumstances that may arise in the course of examination and judgment will need to be exercised by all examiners in the context of their work.

All references to “sections” in the directions and guidance which follow are to sections of the 1993 Act, as amended by the 2006 Charities Act.

Examiners for charities also operating in Scotland, which are registered with the Office of the Charity Regulator (OSCR), should be familiar with the guidance on the accounting framework issued by OSCR. The format of receipts and payments accounts prescribed by regulation in Scotland is also acceptable for filing with the Commission. Similarly accounts which are compliant with the SORP are acceptable for filing with the Commission. However, the examiner will need to prepare a modified report suitable for both jurisdictions. Examples of modified examiner’s reports are provided in Appendix 4. Guidance from OSCR can be accessed via their website: http://www.oscr.org.uk/

Direction

Examination and accounting thresholds

1. Carry out such specific procedures as are considered necessary to provide a reasonable basis on which to conclude (i) that an examination is required under section 43(3), and that section 43(2) (audit) does not apply to the charity; and (ii) where the charity is a small company charity, that it is exempt from audit and is eligible, in accordance with section 477 of the Companies Act 2006, and (iii) where accounts are prepared under section 42(3), that the charity trustees may properly elect to prepare accounts under this sub-section.

Guidance

1.1 Trustees may elect for independent examination (under section 43(3)) and for non-company charities only, the preparation of receipts and payments accounts (under section 42(3)). For either election to be valid, the charity must be within the relevant income bands specified by legislation. Where accounts must be prepared on the accruals basis, because gross income exceeds £100,000, then the aggregate value of the charity’s assets (before deduction of liabilities) must not exceed £2.8m if the examination is to be valid.  

The examiner should be satisfied that:

  • the charity’s gross income for the financial year does not exceed the threshold for independent examination;
  • if receipts and payments are being prepared, that the charity is not a company incorporated under company law;
  • if accruals accounts are required, the aggregate value of the charity’s assets (before deduction of liabilities) disclosed on the charity’s balance sheet does not exceed the threshold for independent examination;
  • whether the charity’s governing document requires any form of professional audit; and
  • whether any grant condition demands an audit.

1.2 Carrying out these procedures at an early stage should prevent the work of the examiner being duplicated by professional audit which would add to the expense for the charity.

1.3 Exceptionally, where the trustees have requested and obtained in advance from the Commission approval for an independent examination instead of an audit, the examiner should obtain a copy of the approval letter from the Commission and make reference to it in the examiner’s report.

1.4 Examiners should also familiarise themselves with the various other threshold bands and their effect on the accounting procedures for charities:

  • Where the charity’s gross recorded income is £10,000 or less, there is no statutory requirement for an independent examination. In such cases the examiner should refer the accounts back to the charity trustees for confirmation as to whether the examination should proceed.
  • Where the accounts comprise a receipts and payments account and statement of assets and liabilities, prepared under section 42(3), the examiner should begin by confirming that the gross income of the charity does not exceed the £100,000 threshold for that year. If it appears that the threshold has been exceeded, the accounts should be referred back to the charity trustees for preparation on the accruals accounting basis under section 42(1). Company charities must provide accounts prepared on an accruals basis, as required by company law.
  • In cases where the charity’s gross recorded income exceeds the statutory audit thresholds of £500,000 gross income, or £2.8m gross assets and gross income exceeding £100,000, the accounts should be referred back to the charity trustees for an auditor to be appointed under section 43(2). A dispensation for an independent examination in place of an audit can be sought from the Commission by the trustees only where there are exceptional circumstances.

1.5 The examiner should consider at an early stage of the examination the level of income disclosed by the accounting records and by the trial balance. The examiner does, however, need to remain alert to any additional information which may come to attention during the course of the examination which indicates that an income threshold has been crossed.

1.6 The level of income for threshold purposes should be calculated in accordance with the methods set out in Appendix 2. If accounts are prepared on the accruals basis then the level of income should be considered on the accruals basis. Where accounts are prepared on the receipts and payments basis then the level of income should be considered on the basis of money actually received.

1.7 The thresholds for audit and independent examination and for receipts and payments accounts are kept under review. The Government has provided for a review of these thresholds following the Charities Act 2006 and consequently it is important to confirm the thresholds that apply. It is therefore recommended that prior to the independent examination taking place that the thresholds are confirmed. Such information can be found via the Charity Commission’s web site.

Direction

Understanding the charity

2. Obtain an understanding of the charity’s constitution, organisation, accounting systems, activities and nature of its assets, liabilities, incoming resources and application of resources in order to plan the specific examination procedures appropriate to the circumstances of the charity.

Guidance

2.1 For a proper examination to be carried out it is important for the examiner to have an understanding of what the charity is aiming to do and how it goes about doing it. The examiner will need to know about the operations, structure and objectives of the charity. This understanding will help the examiner to plan their independent examination by identifying major projects, important activities, possible problems or concerns and to provide background to the analytical review. The steps taken by an examiner would normally include:

  • consideration of the governing document of the charity, paying particular attention to the charity’s objects, powers and obligations;
  • consideration of the matters identified in Appendix 5 to this guidance which would give rise to a statutory duty to make a report to the Commission;
  • discussions with trustees and, where appropriate, the charity’s staff, to ascertain the structure, methods and means by which the charity seeks to achieve its objects;
  • discussions with the trustees and, where appropriate, the charity’s staff, about the affairs, and activities of the charity in order to gain an insight into any special circumstances and problems affecting the charity;
  • reviewing the minutes of trustees’ meetings to find out about details of major events, plans, decisions and changes to the trustee body; and
  • obtaining details of the accounting records maintained and methods of recording financial transactions.

2.2 Normally a discussion with one of the trustees and the person who prepared the accounts should provide all the information or explanations required. However if during the independent examination there is evidence of an absence of minute keeping, or formal trustee meetings, or over-reliance on a key individual, or a lack of appropriate record keeping, the examiner may need to confirm or discuss significant matters with two or more of the trustees and/or members of the charity’s staff to gain the necessary confirmation or evidence that all is well.

Direction

Documentation

3. Record the examination procedures carried out and any matters which are important to support conclusions reached or statement provided in the examiner’s report.

Guidance

3.1 The examiner’s working papers should provide details of the work undertaken and support any conclusions reached, and record any matters of judgment (see Direction 8 paragraph 8.1) which may arise. Working papers should normally be retained by the examiner for six years from the end of the financial year to which they relate, and would normally include:

  • a communication with the trustees which confirms their appointment as the independent examiner. Independent examiners charging a fee or receiving any form of payment should prepare a letter of engagement;
  • a letter of engagement, where appropriate, from the independent examiner to the trustees, together with evidence that this has been accepted by the trustees (for example, a copy of the engagement letter signed by a representative of the trustees);
  • relevant information extracted or obtained from the governing document, trustees’ meeting minutes and a record of discussions with the charity trustees and the charity’s staff;
  • notes as to how any areas of concern have been resolved, including meetings with trustees and charity staff,  together with details of any verification procedures used;
  • where verification procedures have been used, details of checks or vouching carried out during the examination, with conclusions reached and any areas of concern identified;
  • where items are added together as a single entry in the accounts, schedules showing the breakdown of accounting items that have been aggregated for accounts disclosure purposes;
  • copies of any trial balance and the accounts;
  •  the trustees’ annual report where accruals accounts are prepared (recommended but not required for receipts and payments); and
  • in exceptional circumstances, copies of any written assurances that the examiner required of the trustees confirming amounts included within the accounts.

3.2 Where the examiner has cause to resign or is unable to complete their independent examination, the examiner should consider the circumstances carefully and decide if they have a duty to report to the Commission. Even if there is no duty to report, the examiner may decide that they have identified matters which they wish to report because they consider them to be relevant to the work of the Commission. The duty to report and the circumstances that would give rise to a duty are discussed in Appendix 5.

Direction

Comparison with accounting records

4. Compare the accounts of the charity with the charity’s accounting records in sufficient detail to provide a reasonable basis on which to decide whether the accounts are in accordance with such accounting records.

Guidance

4.1 It is necessary to compare the accounts with the underlying accounting records to be satisfied that the accounts properly show what income the charity has received and how it has spent its charitable funds. Where prepared on the accruals basis, all balances in the accounts will need to be compared with the trial balance or any nominal ledger maintained. Where accounts are prepared on the receipts and payments basis a direct comparison with the cash records of the charity should be carried out if no nominal ledger is kept. Records for receipts and payments accounts may amount to bank statements, a file of receipts and invoices, and a simple listing of transactions in a book, or on paper, or entries in a spreadsheet of amounts paid and received with an explanation by each amount.

4.2 Where entries for transactions are not made directly into the nominal ledger, test checks will also be necessary of the posting of entries from books of prime entry (eg petty cash book, any sales or purchase ledgers or day books or gift aid records) to any nominal ledger and/or to the trial balance itself. Similar checks are necessary even where accounting records are maintained by using computer accounting packages.

4.3 A review of bank reconciliations, payroll summaries and control accounts prepared will provide a useful check as to the completeness of posting from books of prime entry.

4.4 There is no requirement for accounting entries to be checked against source documents (eg invoices, supplier statements, purchase orders, gift aid records etc) unless concerns arise during the course of the examination which cannot be resolved by seeking explanations or the explanations given are insufficient.

4.5 Whilst the charity trustees are responsible for the preparation of accounts, on occasion the examiner may also prepare accounts on behalf of the trustees. The preparation of accounts will not generally impinge on independence (see Appendix 1) provided the examiner ensures that the requirements of the Directions are met and provided the accounts to trial balance have been:-

  • prepared by another person, and
  • the examiner has had no direct involvement in the management or administration of the charity.

Qualified accountants in practice and registered auditors should ensure that they meet any practicing or other regulatory requirements of their professional body when undertaking an independent examination. Similarly, consideration will need to be given to relevant ethical and professional guidelines or standards issued by their professional bodies or standard setters when preparing accounts from the trial balance and then examining those accounts. Where ethical or professional guidelines or standards require any additional disclosures relating to accounts preparation in the examiner’s report then qualified examiners will need to consider such requirements when making their reports.

Direction

Accounting records

5. Review the accounting records maintained in accordance with section 41, or, in the case of a charity that is a company, the accounting records maintained in accordance with section 386 of the Companies Act 2006, in order to provide a reasonable basis for the identification of any material failure to maintain such records.

Guidance

5.1 The charity trustees are responsible for maintaining the accounting records. This is an important responsibility and an absence of well organised and complete accounting records gives rise to a significant risk of losses from fraud, theft, or the misapplication of charitable funds.

5.2 The examiner is required to review the accounting records with a view to identifying any material failure to maintain such records in accordance with the trustees’ legal duty. For trustees of non-company charities their duty is under section 41(1). For trustees (normally termed directors) of company charities their legal duty is under section 386(2) of the Companies Act 2006.

5.3 The review procedures are not aimed at identifying the occasional omission or insignificant error, but at any gross failure to maintain records in a manner consistent with statutory requirements.

5.4 Accounting records should be well organised and capable of ready retrieval and analysis. The records may take a number of forms, for example book form, loose-leaf binder or computer records.

5.5 The accounting records should:

  • be up to date;
  • be readily available; and
  • provide the basic information from which the financial position can be ascertained, not only at the year end, but also on any selected date.

5.6 The accounting records should contain:

  • details of all money received and expended, the date, and the nature of the receipt or expenditure; and
  • details of assets and liabilities.

5.7 Smaller charities do not have to maintain formal ledgers to record assets and liabilities, and in such instances the requirements can generally be met by maintaining a simple record of transactions and files for unpaid invoices and amounts receivable. A record of fixed assets is generally necessary to meet the accounting requirements.

5.8 Company charities are required by section 386 of the Companies Act 2006 to maintain accounting records that contain:
(a) entries from day to day of all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place, and
(b) a record of the assets and liabilities of the company.

5.9 Company charities dealing in goods must also maintain stock records, the particular requirements for which are set out in section 386(4) of the Companies Act 2006.

Direction

Analytical procedures

6. Carry out analytical procedures to identify unusual items or disclosures in the accounts. Where concerns arise from these procedures, the examiner must seek explanation from the charity trustees. If, after following such procedures, the examiner has reason to believe that in any respect the accounts may be materially mis-stated then additional procedures, including verification of the asset, liability, incoming resource or application, must be carried out.

Guidance

6.1 The analytical review involves comparing the analysis of the income and expenditure of the current year with the previous year to identify any significant changes from year to year. It is important that the examiner looks carefully at the final accounts to see if they reveal any unusual items, unexpected fluctuations, or inconsistencies with other financial information. This procedure is called analytical review. Steps taken would normally include:

  • comparing the accounts with those for comparable prior periods;
  • comparing the accounts with any budgets or forecasts that have been produced;
  • considering whether incoming resources are consistent with known fund-raising sources, for example the history of cash collections or fundraising events, grants received, income from trading, or income from the sale of donated goods;
  • considering whether the spending of charitable resources is consistent with the payroll details, and the activities and the objects of the charity - it is important to have obtained a proper understanding of the nature of the charity’s activities and affairs for this aspect of the review to be successful;
  • considering whether the liabilities and current assets disclosed are consistent with the scale and type of activities undertaken, or in the case of receipts and payments accounts whether all significant  assets and liabilities are listed ;
  • considering whether fixed assets investments are producing income consistent with the nature of assets held; and
  • considering whether any tangible fixed assets held are consistent with the scale and type of activities undertaken by the charity.

6.2 Where analytical review procedures identify any unusual items, unexpected fluctuation or inconsistency then explanations should be sought from the charity trustees or, where appropriate, the charity’s staff.

6.3 Only if the explanations provided by the charity trustees, or where appropriate, the charity’s staff, do not satisfy the examiner, will additional procedures be necessary. Such procedures may include:

  • physical inspection of a tangible fixed asset;
  • verification of title to an asset;
  • inspection of third party documentary evidence (eg invoice, contract or agreement) to verify an expense or liability or to confirm an amount of income received or receivable;
  • third party certification of a bank balance, or other asset held including the custody of investment certificates; and
  • checking of a post year end receipt or payment to confirm recoverability of a debt or the amount of a liability.

6.4 A comprehensive list of analytical procedures, and of additional procedures where concerns arise, is beyond the scope of this publication, and will to an extent be an area in which the examiner will need to exercise judgment and to draw on experience.

Direction

Form and content of accounts

7. Carry out such detailed procedures as the examiner considers necessary to provide a reasonable basis on which to decide whether or not the accounts prepared under section 42(1) comply as to the form and content of charity accounts with the requirements of the Regulations and are prepared in accordance with the methods and principles set out in the Statement of Recommended Practice: Accounting and Reporting by Charities (the SORP) or in the case of a charity that is a company, whether or not the accounts are prepared in accordance with section 394 of the Companies Act 2006, and are consistent with the SORP.

Guidance

7.1 Charities do not trade for profit and so the form and content of charity accounts must reflect their charitable activities. By far the majority of non-company charities have a gross income below £100,000 and are eligible to prepare receipts and payments accounts. A minority of charities, those with a gross income in excess of £100,000 and all company charities irrespective of income, should prepare accruals accounts in accordance with the charities SORP.

7.2 The 2007 Regulations draw heavily on the recommendations of the Statement of Recommended Practice - Accounting and Reporting by Charities (the SORP, published in March 2005). The examiner will require access to the SORP and an understanding of its general principles to ensure compliance with the Regulations. In particular the 2007 Regulations require the accounts and certain notes to the accounts to be prepared in accordance with the methods and principles set out in the SORP.

7.3 Where accounts are prepared under section 42(1) (the accruals basis), the 2007 Regulations lay down the requirements as to the form and content of non-company charity accounts. The 2007 Regulations concerning the content of accounts do not apply to the accounts of company charities. However the accounts of company charities must be prepared on a ‘true and fair’ basis in accordance with section 393 of the Companies Act 2006. The preparation of company accounts on a ‘true and fair’ basis requires compliance with UK Generally Accepted Accounting Practice (UK GAAP). As UK GAAP Financial Reporting Standard 18, Accounting Policies advises that compliance with a Statement of Recommended Practice is normally required to give a ‘true and fair’ view, the SORP should be followed.

7.4 The examiner should be conversant with the 2007 Regulations as to the form and content of charity accounts prepared on the accruals basis and should examine the accounts in sufficient detail to ensure compliance with these Regulations. Further detail is also available for non-company charities in our Accruals Accounts Pack (CC17).

7.5 The 2007 Regulations do not specify the form and content of accounts prepared on a receipts and payments basis. Guidelines on the form and content of such accounts, which can be prepared by eligible non-company charities only, can be found in notes included in our Receipts and Payments Accounts Pack (CC16).

7.6 For company charities, the Companies Act 2006, section 396 requires the preparation of individual accounts. In the case of not-for-profit undertakings, including charities, the Companies Act 2006 section 474(2), substitutes an income and expenditure account for the profit and loss account. In addition a balance sheet is required and additional information is to be provided in the notes. The SORP requires all charities preparing accruals accounts to prepare a Statement of Financial Activities, balance sheet, and accompanying notes to the accounts. A company charity may therefore submit a Statement of Financial Activities that incorporates an income and expenditure account, or opt to submit both an income and expenditure account and a Statement of Financial Activities.

7.7 Although the examiner has no duty under company law, where a separate income and expenditure statement is prepared by a company charity in addition to the Statement of Financial Activities, the examiner should ensure that the income and expenditure account is consistent with the Statement of Financial Activities and that both statements can be reconciled with the balance sheet. In carrying out their independent examination, the examiner should review all the accounting statements and so should be conversant with Companies Act requirements (refer to Appendix 8).

Direction

Accounting policies, estimates and judgments

8. When accounts are prepared under section 42(1), or in the case of a charity which is a company, prepared under section 394 of the Companies Act 2006, review the accounting policies adopted and consider their consistency with the Statement of Recommended Practice: Accounting and Reporting by Charities and their appropriateness to the activities of the charity. The examiner must also consider and review any significant estimate or judgment that has been made in preparing the accounts.

Guidance

8.1 Receipts and payments accounts report cash book transactions in the period and so are not affected by this Direction. Accounts prepared on an accruals basis involve the use of accounting policies to identify the judgments, valuations, and estimates that must be made to the accounts, for example the length of time over which an asset is to be depreciated.

8.2 Where accounts are prepared under section 42(1) (the accruals basis) or under the Companies Act 2006 section 393 to give a ‘true and fair’ view, the accounting policies adopted, and also any estimates or judgments made in preparing the accounts, may have a material effect on both the financial activities and state of affairs disclosed by the accounts. Such matters therefore require careful consideration by the examiner.

8.3 The examiner should be satisfied that accounts are prepared on a basis consistent with the going concern assumption and accruals concept, and that the accounting policies adopted and applied are appropriate to the activities of the charity and consistent with the Statement of Recommended Practice - Accounting by Charities (the Charities SORP, published in March 2005). The accounting policies adopted should ensure a relevant, reliable, comparable and understandable accounts presentation.

8.4 The examiner should consider whether the accounting policies adopted are consistent with the methods and principles set out in SORP 2005. Where the accounting policies depart from the SORP, this should be drawn to the attention of the charity trustees and the item in question and the nature of the departure should normally be reported in the examiner’s report.

8.5 Where accounts are produced under the Companies Act, although the examiner is not required to provide a formal opinion about whether the accounts giving a ‘true and fair view’, the examiner should ensure that the accounts prepared are consistent with the SORP. By following the SORP, the preparers of the accounts ensure that the accounts give a ‘true and fair’ view. Where accounting policies depart from the SORP, this should be drawn to the attention of the charity trustees and the item(s) in question and the nature of the departure should be reported in the examiner’s report.

8.6 For both non-company and company charities, where an accounting policy or treatment departs from the SORP, the examiner should be satisfied that the departure has been explained in the notes to the accounts.

8.7 The examiner must consider the reasonableness of any estimates or judgments where they are material to the accounts. Matters that may require consideration include:

  • that the accounting policies follow those of the SORP and that any departure from SORP only arises because the alternative approach provides a  more ‘true and fair’ view;
  • transfers to or from restricted fund accounts;
  • valuation of gifts in kind;
  • valuation of fixed asset investments where no market prices exist;
  • estimates resulting from transactions not being fully recorded in the accounting records; and
  • where an activity approach has been adopted, the allocation of costs between the various expenditure categories of the Statement of Financial Activities.

8.8 If accounts are prepared on the receipts and payments basis under section 42(3), the only fundamental accounting concept which applies is that of consistency. Accounting policies and judgmental issues have less relevance since the receipts and payments account is simply a factual record of money actually received and expended. The statement of assets and liabilities is a straightforward schedule of information.

8.9 Further guidance as to the form and content of receipts and payments accounts can be found in notes included in our Receipts and Payments Accounts Pack (CC16).

Direction

Events subsequent to the year end

9. When accounts are prepared under section 42(1), or in the case of a charity which is a company, prepared under section 394 of the Companies Act 2006, enquire of the charity trustees as to material events subsequent to the year end of the accounts examined which may require adjustments or disclosure in the accounts.

Guidance

9.1 Receipts and payments accounts report cash book transactions in the period and so are not directly affected by events after the year-end. However, where accounts are prepared under section 42(1) (the accruals basis), or under the Companies Act 2006 section 393 to give a ‘true and fair’ view, an event occurring after the balance sheet date may have a material effect on both the financial activities and state of affairs disclosed by the accounts.

9.2 The events that have occurred subsequent to the year end should therefore be discussed with the charity trustees and, where appropriate, with the charity’s staff. Any effects on the accounts under review should be considered. The matters that should be discussed include:

  • whether any income anticipated and accrued into the accounts at the year end has proved irrecoverable;
  • discovery of an error or fraud;
  • crystallisation of a taxation liability;
  • repayment of a grant or donation received;
  • a valuation of a property indicating a permanent diminution in value.

9.3 Where an event occurring subsequent to the year end affects the amount or disclosure of an item in the accounts this should be brought to the attention of the charity trustees with a view to the accounts being amended.

9.4 If accounts are prepared on a receipts and payments basis under section 42(3) of the 1993 Act, then there is no requirement to consider events subsequent to the year end, unless information comes to light during the independent examination which gives rise to concerns which need to be addressed in this way.

Direction

Trustees’ annual report

10. When accounts are prepared under section 42(1), or in the case of a charity which is a company, prepared under section 394 of the Companies Act 2006, compare the accounts to any financial references in the charity trustees’ annual report (if any); identifying any major inconsistencies and consider the significance such matters will have on a proper and accurate understanding of the charity’s accounts.

Guidance

10.1  If accounts are prepared on the receipts and payments basis under section 42(3) there is no requirement placed on the examiner to consider the trustees’ annual report. The examiner may, nevertheless, find the annual report a useful guide to the activities of the charity.

10.2  The trustees’ annual report (or director’s report for a company charity) provides a report of the charity’s activities during the financial year. The 2007 Regulations specify the information that is to be contained in such reports and the requirements concerning the trustees’ annual report apply to both company and non-company charities. Company charities must also meet the company law requirements regarding the directors’ report.

10.2  Procedures should be directed at identifying inconsistencies with the accounts which are misleading or which contradict the financial information contained in the accounts.

10.3  Where inconsistencies are identified which may have a significant effect on the proper understanding of the accounts, this should be drawn to the attention of the charity trustees. If no appropriate amendment is made to the annual report then details of the matter should be provided in the examiner’s report.

Direction

Examiner’s report

11. Review and assess all conclusions drawn from the evidence obtained from the examination and consider the implications on the report to be made under Regulation 12 of the 2007 Regulations. If the examiner has cause to make a positive statement on any matter arising from the provisions of Regulation 12 (1)(h) or 12 (2)( c) and 12(1)(i), or to make a statement on any matter arising from the provisions of Regulation 12(1)(j) or 12(2)(d), then the examiner must ensure so far as practicable that the report so made gives a clear explanation of the matter and of its financial effects on the accounts presented.

Guidance

11.1  The examiner’s report is the outcome of an independent examination, giving either confidence that the all the requirements have been met, or identifying which requirements have not been met, together with any problems that need reporting for the benefit of the reader of the charity’s accounts. The examiner needs to consider carefully the conclusions drawn from their examination, and the impact of these conclusions on their report. Appendix 4 provides illustrative examples of independent examiner’s reports.

11.2  The 2007 Regulations set out the legal requirements for an independent examination. In providing the first part of the examination report the examiner must state:

  • his or her name and address and the name of the charity concerned;
  • the financial year in respect of which the accounts to which the report relates have been prepared, and where the charity is a charitable company, that the accounts do not require an audit in accordance with Part 16 of the Companies Act 2006;
  • whether the gross income exceeds £250,000 and where it does, the qualification which enables him or her to act as an independent examiner;
  • any relevant professional qualification the examiner holds;
  • in the event that the independent examination is in place of an audit, the date when the Commission dispensed with the requirement for an audit; and
  • that the independent examination has been conducted in accordance with the Directions given by the Commission.

After making these statements, the examiner must then state whether or not any matter has come to attention, in connection with the examination, which gives reasonable cause to believe that in any material respect:

  • accounting records for non-company charities have not been kept in accordance with section 41;
  • or where the charity is a charitable company, the accounting records for have not been kept in accordance with section 396 of the Companies Act 2006; or
  • the accounts do not accord with the accounting records; or
  • where the accounts are prepared on an accruals basis, the accounts do not accord with Regulation 3. Regulation 3(6) requires that where accounts are prepared in accordance with section 42(1) of the Charities Act 1993 those accounts will consist of a Statement of Financial Activities and balance sheet, and the accounts are prepared in accordance with the methods and principles set out in the Statement of Recommended Practice.

11.3  Where any of the above concerns have been identified, there should be a clear explanation of the nature of the failure and, where it can be estimated its financial effects on the accounts.

11.4  If the concern relates to non-compliance by a non-company charity with the relevant Regulations and/or the SORP, as to the form and content of accounts, this should be raised first with the charity trustees to seek the necessary amendment to the accounts. If the concern relates to non-compliance by a company charity with company law or material inconsistency with the SORP as to the form and content of accounts, this should be raised first with the charity trustees to seek the necessary amendment to the accounts.

11.5  The examiner in the second part of their report is also required to state whether or not any matter has come to attention in connection with the examination to which, in the examiner’s opinion, attention should be drawn in the report to enable a proper understanding of the accounts to be reached. These matters should be brought to the attention of the charity trustees first with a view to seeking an amendment or adjustment to the accounts but if concerns remain the matter should be addressed in the examiner’s report. The matter concerned should be fully explained together with the financial effects on the accounts.

11.6  There is also a requirement to provide a statement if the following matters have become apparent to the examiner during the course of the examination:

  • any material expenditure or action which appears not to be in accordance with the trusts of the charity;
  • any failure to be provided with information and explanation by any past or present trustee, officer or employee that is considered necessary for the examination; and
  • in the case of accruals accounts any material inconsistency between the accounts and the trustees’ annual report (or director’s report).

11.7  In order to identify any material expenditure or activities undertaken outside the objects of the charity, an understanding of the stated objects of the charity, as set out in its governing document, is necessary. Small or immaterial levels of expenditure on purposes outside of the objects of the charity will not generally be included in the examiner’s report. Material expenditure, or significant actions, contrary to the trusts of the charity would be a major concern and details should be included on the examiner’s report. The examiner need not carry out specific checks or procedures to identify such breaches, but such matters when identified must be included in the examiner’s report.

11.8  Any failure to be provided with information and explanations may seriously hamper an examination. If information and explanations requested are not provided this matter must be included in the examiner’s report.

11.9  In the case of accounts prepared on an accruals basis any major inconsistency between the accounts and the trustees’ annual report may give rise to misunderstanding. This should be brought to the attention of the charity trustees with a view to the amendment of the discrepancy. If the trustees decline to agree to change their annual report or where concerns still exist this must be stated in the examiner’s report.

11.10 For NHS charities independently examined by an examiner appointed by the Audit Commission or the Auditor General for Wales, the examiner has equivalent reporting duties but these are set out in Regulation 13 of the 2007 Regulations.

Statutory duty to report matters of material significance to the Charity Commission

The Charities Act 2006 sections 29 and 33, amend the Charities Act 1993 section 44, and place a duty upon the independent examiners or auditors of both the non-company and company charities to make a report to the Charity Commission, where in the course of their examination, they identify a matter, which relates to the activities or affairs of the charity or of any connected institution or body, and which the examiner or auditor has reasonable cause to believe is likely to be of material significance for the purposes of the exercise by the Commission of its functions under section 8 or 18 of the Charities Act 1993.

Guidance

12.1  In addition to the requirement to make their examiner’s report, the examiner has a legal responsibility to report matters of concern which are of material significance to the Charity Commission as the regulator. It is important to emphasise there is neither a legal duty nor an expectation that the examiner will actively go looking for matters of material significance that they may need to report. However where the examiner comes across such matters as part of their work, they then make a report.

12.2  Whilst it is anticipated that the vast majority of charities are operate for public benefit, exceptions may arise where all is not well and there are significant concerns. Appendix 5 sets out what the expectations of the Commission are of the examiner, provides a model report and gives some practical examples of matters to consider when reporting.

12.3  The examiner is recommended to read appendix 5 as part of their preparation and keep the particular matters of material significance in mind as they carry out their work so that if a matter arises they are then aware if we would consider it materially significant. Alternatively the examiner could conduct their examination and if they come across a matter that concerns them they can compare it with the matters listed in appendix 5 to see if the Commission would view it as materially significant.

12.4  The examiner must make a report to the Commission if they believe that in the course of the independent examination they have identified a matter which is likely to be of material significance to the Commission with regard to the Commission’s formal inquiry powers under section 8 or 18 of the Charities Act 1993. A reporting requirement would not arise through mere inadvertence or error of judgment on the part of a trustee whilst endeavouring honestly to carry out trustee duties. It is also unlikely that a reporting duty will normally arise unless a significant loss or misapplication of funds has resulted or could result.

12.5  The duty to report relates to information or evidence obtained from the examiner’s work undertaken in fulfilling the Commission’s Directions or whilst acting in the capacity of the examiner of a charity. It is not intended that the examiner should report on small or insignificant matters, particularly where such matters have been satisfactorily resolved internally.

12.6  The reporting duty relates primarily to the actions of the charity trustees. In considering the individual actions of trustees, the examiner should take into account the trustees’ overall responsibilities of management and control.

12.7  Where a reporting duty arises the examiner should report the matter in writing to the Assessments Unit Manager, Charity Commission Direct, PO Box 1227, Liverpool, L69 3UG. The examiner should state: 

  • the charity’s name and registration number;
  • state that the report is made in accordance with section 44A of the Charities Act 1993;
  • state the examiner’s name and contact address, telephone number and/ or e-mail address;
  •  state under which of the eight headings (refer to appendix 5) the report is being made
  • describe the matter giving rise to concern and, where possible, provide an estimate of the financial implications; and
  • where the trustees are attempting to redress the situation, a brief description of any steps being taken.

12.8  The matters that will give rise to a legal duty to report, and an example of such a report, are set out in Appendix 5.

12.9 The Charities Act 2006 also amended the Charities Act 1993, section 44, to provide a discretionary power to the examiner to make a report where they become aware of a matter, which the examiner has reasonable cause to believe is likely to be relevant for the purposes of the exercise by the Commission of any of its functions. There is no obligation to make a report under such circumstances and examiners need not report small or insignificant matters, particularly where such matters have been satisfactorily resolved internally. The Commission exercises a proportionate approach to the regulation of charities and unlike the serious matters giving rise to a duty to report, as explained above, few matters covered by the discretionary power are likely to be of interest to the Commission due to the comparatively low risk to charitable funds arising from charities with incomes below the audit threshold. An example of a discretionary report is set out in Appendix 5.

12.10 Where the examiner is exercising their discretion to report matters which may be relevant to the work of the Commission, the examiner should report the matter in writing to: The Assessments Unit Manager, Charity Commission Direct, PO Box 1227, Liverpool, L69 3UG. The examiner should state: 

  • the charity’s name and registration number;
  • state the examiner’s name and contact address, telephone number and/ or e-mail address;
  • state that the report is made using the examiner’s power of discretion to report a matter relevant to the work of the Commission in accordance with section 44A of the Charities Act 1993;
  • describe the matter, the examiner’s view of its relevance to the work of the Commission, and, where possible, provide an estimate of the financial implications; and
  • where the trustees are attempting to redress the situation, a brief description of any steps being taken.

Appendix 1: Guidance on the selection of an examiner

Charity Commission guidance under section 43(7) (a) of the Charities Act 1993

Guidance from the Charity Commission to charity trustees on the selection of a person for appointment as an independent examiner. References to sections are references to the 1993 Act.

1. The requirement for an independent examination

1.1 The following criteria determine eligibility for independent examination:

a) Small charitable companies are eligible for independent examination, provided their gross income is £500,000 or less in the current year, and aggregate value of their assets (before deduction of liabilities) are £2.8m or less. Where the aggregate value of assets exceeds £2.8m, an independent examination can only be carried out if gross income is £100,000 or less.
b) All charities with a gross income in the current year exceeding £10,000 must have their accounts independently examined, or may choose to have the accounts audited.
c) All charities whose gross income is more than £500,000 in the current year, or gross income exceeding £100,000 and aggregate value of assets exceeding £2.8m, must have a professional audit. Trustees cannot opt for an independent examination if either threshold is exceeded.
d) All charities where the governing document requires them to have an audit must do so (although if this means a higher level of scrutiny is necessary than otherwise required by the 1993 Act, we are prepared to consider an amendment to the governing document to accord with the 1993 Act independent examination provisions).

1.2 The charity trustees should take steps to ensure that a competent examination takes place and they will therefore wish to consider most carefully the suitability of a prospective independent examiner.

1.3 Charity trustees are entitled to pay reasonable remuneration to an independent examiner for services rendered and if they are unable to obtain the services of a competent examiner on a voluntary basis, should be prepared to pay such remuneration and regard it as a proper charge on the assets of the charity.

2. The independent examiner

2.1 An independent examiner as described in section 43(3) (a) is “an independent person who is reasonable believed by the charity trustees to have the requisite ability and practical experience to carry out a competent examination of the accounts” (our emphasis).

3. An independent person

3.1 For an examiner to be independent that individual should have no connection with the charity trustees which might inhibit the impartial conduct of the examination.

3.2 Where a potential independent examiner is a member of the charity, for example a member of a church congregation, provided they have not been involved in the day to day decision making or administration of the charity, for example by serving on a committee or sub-committee convened by the charity, and are not connected with the charity trustees, then normally they may act as an examiner, subject to their having the necessary skills, qualification or experience required. Also the right to take part, or participation, as a member in an annual general meeting would not preclude the examiner from conducting an independent examination.

3.3 Whether a connection exists with the charity trustees, will depend upon the circumstances of a particular charity but the following persons at least will normally be considered to have such a connection:

a) the charity trustees or anyone else who is closely involved in the administration of the charity;
b) a major donor to or major beneficiary of the charity; or
c) a close relative, spouse, partner, business partner or employee of any person who falls within sub-paragraph (a) or (b) above.

4. Requisite ability

4.1 In the House of Lords’ debate on the Charities Bill which led to the 1993 Act, it was stated that “an independent examiner must obviously be competent for the task that he is to do and he must be familiar with accounting methods, but he need not be a practising accountant. We have in mind ... people such as bank or building society managers, local authority treasurers or retired accountants. They would all be suitable as independent examiners”.

4.2 The quality of the evidence of ability which is required will depend upon the size and nature of the charity’s transactions. Charity trustees should consider taking independent references on the capability of the prospective independent examiner to carry out this function.

4.3 Where accounts are prepared on the accruals basis in accordance with regulations, a commensurate understanding of accountancy principles and accounting standards will be needed, including the SORP.

5. Independent examiners for charities with a gross income exceeding £250,000

5.1 The Charities Act 2006 requires that where a charity is eligible for an independent examination and its gross income exceeds £250,000 the examiner must be a member of one of the following recognised bodies:

  • Institute of Chartered Accountants in England and Wales;
  • Institute of Chartered Accountants of Scotland;
  • Institute of Chartered Accountants in Ireland;
  • Association of Chartered Certified Accountants;
  • Association of Authorised Public Accountants;
  • Association of Accounting Technicians;
  • Association of International Accountants;
  • Chartered Institute of Management Accountants;
  • Institute of Chartered Secretaries and Administrators;
  • Chartered Institute of Public Finance and Accountancy; or

be a Fellow of the Association of Charity Independent Examiners.

Where an examiner is a member of a listed body, the trustees should ask the examiner for an assurance that there is no ethical reason why they cannot act as the charity’s independent examiner.
The examiner should consider the ethical code issued by their professional body, or where the examiner is a registered auditor, the Audit Practices Board.

6. Practical experience

6.1 Charity trustees should satisfy themselves that prospective examiners have practical experience relevant to the charity in question which might be by virtue of that person having:

  • had an involvement in the financial administration of a charity of a similar nature; or
  • acted successfully as an independent examiner on previous occasions for such charities; or
  • relevant practical experience in accountancy or commerce.

7. Selection procedures

7.1 Charity trustees should discuss fully with the prospective examiner the work of the charity and their expectations. They should ensure that the prospective independent examiner is conversant with the Charity Commission Directions to independent examiners and the nature of the independent examiners’ report prescribed by the 2007 Regulations made under section 44(1)(c). Where the accounts are prepared under section 42(1), the examiner should also be conversant with the Regulations made under section 42(1) as to the form and content of those accounts and the SORP. Where the charity is a small company, the examiner should also be conversant with the Companies Act 2006 and associated Regulations as to the form and content of those accounts and the SORP.

7.2 Charity trustees should take all necessary steps to satisfy themselves as to the matters referred to in paragraphs 3 to 6 of Appendix 1 above.

7.3 Charity trustees should ensure that any written terms of engagement recognise, and do not limit, the examiner’s statutory duties.

7.4 Charity trustees who follow these guidelines and gain suitable assurances from prospective examiners, and from any references, can be satisfied that they have taken all reasonable steps to obtain a competent independent examination of their accounts for the period in question.

Appendix 2: Calculation of gross income

Section 97 to part X of the Charities Act 1993 states that a reference to the gross income of a charity:  “means its gross recorded income from all sources including special trusts”. This broad definition is interpreted for administrative purposes by the Commission when setting the Annual Return requirements and making the Annual Return directions under section 48 to Part VI of the Charities Act 1993. The definition of gross income is reviewed annually in preparation for the Annual Return process.

The definition of gross income (Annual Return 2006)

Gross income
This is the total recorded income of the charity in all unrestricted andrestricted income funds but not resources received as capital (endowment) funds, nor capital gains in an income fund.
You should calculate income before deduction of any costs or expenses.

The calculation of income should include:

  • voluntary income from donations (including gift aid tax reclaims), grants, gifts and legacies (see note 1 below);
  • gross proceeds from fund-raising and other trading activities undertaken for
  • generating funds;
  • investment income (including interest, dividends, related tax reclaims and
  • rents);
  • gross proceeds from the sale of goods or services in furtherance of the
  • charity’s objectives; and
  • the amount of any expendable endowment spent or transferred to income funds and where a charity operates a total return approach to investment of capital funds, the amount of any unapplied total return allocated or transferred to income funds during the year. (see note 2 below).

The calculation should exclude the following from income:

  • receipt of a loan by the charity;
  • loan repayments to the charity;
  • proceeds, gains or profits on sale or disposal of investments and functional fixed assets; and
  • actuarial gains on any defined benefit pension scheme.

Note 1:  Any gifts or donations (including any tax related reclaims) etc which the donor expects will be, or may be, retained for investment by the charity are capital (endowment), and should
be excluded.

Note 2:  Any allocation of unapplied total return will only affect endowed charities that have obtained a consent order from the Charity Commission to operate a total return approach to investments.

Appendix 3: Flowchart indicating eligibility requirements for independent examination

Flowchart Graphic

 

Appendix 4: Examples of examiner’s reports

These example reports are provided to help new and experienced examiners to word their reports in a way which complies with the 2007 Regulations. The examples cover the majority of situations that an examiner may encounter in their work. Where all is well and there are no matters of significant concern the charity is given a clean or ‘unqualified’ examiner’s report. Where there are concerns the report given by the examiner is qualified in some way and so a qualified report is given.

The requirements of charities registered in Scotland are different to those registered in England and to satisfy the requirements of both a special type of report is required, where a charity registered in England and Wales is also registered in Scotland.

Please note that there is a new requirement to advise whether the charity’s income is greater than or less than £250,000 and if greater than £250,000 the examiner must confirm their qualification(s) that permit them to be eligible to undertake the examination. The examples demonstrate this requirement.

In exceptional circumstances, the Commission may permit an independent examination to be carried out instead of an audit. The Regulations require the examiner to disclose in their report if their examination is in place of an audit and the date of the Commission’s dispensation.

The examples are:

1. Unqualified report for a non-company charity.
2. Unqualified report for a charitable company
3. Unqualified report for a non-company charity also registered in Scotland
4. Unqualified report for a charitable company also registered in Scotland
5. Qualified report where a non-company charity has failed to disclose investments at market value.
6. Qualified report where a significant concern requires a matter to be reported for a non-company charity
7. Qualified report where a significant concern requires a matter to be reported for a charitable company

Example 1: Examiner’s unqualified report (for a non-company charity)

Independent Examiner’s Report to the Trustees of “ABC” Trust

I report on the accounts of the Trust for the year ended 30 April 2008, which are set out on pages 00 to 00.

Respective responsibilities of trustees and examiner

The charity’s trustees are responsible for the preparation of the accounts. The charity’s trustees consider that an audit is not required for this year (under section 43(2) of the Charities Act 1993 (the 1993 Act)) and that an independent examination is needed and the charity’s income for the year was below £250,000.

It is my responsibility to:

  • examine the accounts (under section 43(3)(a) of the 1993 Act);
  • to follow the procedures laid down in the general Directions given by the Charity Commission (under section 43(7)(b) of the 1993 Act); and
  • to state whether particular matters have come to my attention.

Basis of independent examiner’s report

My examination was carried out in accordance with the general Directions given by the Charity Commission. An examination includes a review of the accounting records kept by the charity and a comparison of the accounts presented with those records. It also includes consideration of any unusual items or disclosures in the accounts, and seeking explanations from you as trustees concerning any such matters. The procedures undertaken do not provide all the evidence that would be required in an audit, and consequently I do not express an audit opinion on the view given by the accounts.

Independent examiner’s statement

In connection with my examination, no matter has come to my attention:

(1)  which gives me reasonable cause to believe that in any material respect the requirements

  • to keep accounting records in accordance with section 41 of the 1993 Act; and
  • to prepare accounts which accord with the accounting records and comply with the accounting requirements of the 1993 Act

have not been met; or

(2)  to which, in my opinion, attention should be drawn in order to enable a proper understanding of the accounts to be reached.

Name:
Relevant professional qualification or body:
Address:
Date:

Example 2: Examiner’s unqualified report (for a company charity)

Independent Examiner’s Report to the Trustees of “WXY Charitable Company”

I report on the accounts of the company for the year ended 30 April 2008, which are set out on pages 00 to 00.

Respective responsibilities of trustees and examiner

The company’s trustees are responsible for the preparation of the accounts. The company’s trustees consider that an audit is not required for this year (under section 43(2) of the Charities Act 1993 (the 1993 Act)) and that an independent examination is needed.  The charity’s income exceeded £250,000 and I am qualified to undertake the examination by being a qualified member of (named body).

Having satisfied myself that the charity is not subject to audit under company law and is eligible for independent examination, it is my responsibility to:

  • examine the accounts (under section 43(3)(a) of the 1993 Act);
  • to follow the procedures laid down in the general Directions given by the Charity Commission (under section 43(7)(b) of the 1993 Act); and
  • to state whether particular matters have come to my attention.

Basis of independent examiner’s report

My examination was carried out in accordance with the general Directions given by the Charity Commission. An examination includes a review of the accounting records kept by the charity and a comparison of the accounts presented with those records. It also includes consideration of any unusual items or disclosures in the accounts, and seeking explanations from you as trustees concerning any such matters. The procedures undertaken do not provide all the evidence that would be required in an audit, and consequently I do not express an audit opinion on the view given by the accounts.

Independent examiner’s statement

In connection with my examination, no matter has come to my attention:
(1)  which gives me reasonable cause to believe that in any material respect the requirements

  • to keep accounting records in accordance with section 386 of the Companies Act 2006; and
  • to prepare accounts which accord with the accounting records, comply with the accounting requirements of the Companies Act 2006 and which are consistent with the Statement of Recommended Practice.

have not been met; or

(2)  to which, in my opinion, attention should be drawn in order to enable a proper understanding of the accounts to be reached.
Name:
Relevant professional qualification or body:
Address:
Date:

Example 3: Examiner’s unqualified report (for a non-company charity also registered with the Office of the Scottish Charity Regulator)

Independent Examiner’s Report to the Trustees of “ABC” Trust
I report on the accounts of the Trust for the year ended 30 April 2008, which are set out on pages 00 to 00.

Respective responsibilities of trustees and examiner
The charity’s trustees are responsible for the preparation of the accounts. The charity’s trustees consider that an audit is not required for this year (under section 43(2) of the Charities Act 1993 (the 1993 Act) and in accordance with Regulation 11 of The Charities Accounts /(Scotland) Regulations 2006 and that an independent examination is needed. The charity’s income exceeded £250,000 and I am qualified to undertake the examination by being a qualified member of (named body).

It is my responsibility to:

  • examine the accounts (under section 43(3)(a) of the Charities 1993 Act) and section 44(4) of the Charities and Trustee Investment (Scotland) Act 2005;
  • to follow the procedures laid down in the general Directions given by the Charity Commission (under section 43(7)(b) of the 1993 Act), having regard to the guidance given by the Office of the Scottish Charity Regulator; and
  • to state whether particular matters have come to my attention.

Basis of independent examiner’s report
My examination was carried out in accordance with the general Directions given by the Charity Commission and is in accordance with the good practice guidance issued by the Office of the Scottish Charity Regulator. An examination includes a review of the accounting records kept by the charity and a comparison of the accounts presented with those records. It also includes consideration of any unusual items or disclosures in the accounts, and seeking explanations from you as trustees concerning any such matters. The procedures undertaken do not provide all the evidence that would be required in an audit, and consequently I do not express an audit opinion on the view given by the accounts.

Independent examiner’s statement
In connection with my examination, no matter has come to my attention:

(1)  which gives me reasonable cause to believe that in any material respect the requirements

  • to keep accounting records in accordance with section 41 of the 1993 Act and section 44 of the 2005 Act ; and
  • to prepare accounts which accord with the accounting records and comply with the accounting requirements of the 1993 Act and of the 2005 Act

have not been met; or
(2)  to which, in my opinion, attention should be drawn in order to enable a proper understanding of the accounts to be reached.
Name:
Relevant professional qualification or body:
Address:
Date:

Example 4: Examiner’s unqualified report (for a company charity also registered with the Office of the Scottish Charity Regulator)

Independent Examiner’s Report to the Trustees of “WXY Charitable Company”
I report on the accounts of the company for the year ended 30 April 2008, which are set out on pages 00 to 00.

Respective responsibilities of trustees and examiner
The company’s trustees are responsible for the preparation of the accounts. The company’s trustees consider that an audit is not required for this year (under section 43(2) of the Charities Act 1993 (the 1993 Act) and in accordance with Regulation 11 of The Charities Accounts /(Scotland) Regulations 2006) and that an independent examination is needed and the charity’s income for the year was below £250,000.

Having satisfied myself that the charity is not subject to audit under company law and is eligible for independent examination, it is my responsibility to:

  • examine the accounts (under section 43(3)(a) of the 1993 Act) and section 44(4) of the Charities and Trustee Investment (Scotland) Act 2005;
  • to follow the procedures laid down in the general Directions given by the Charity Commission (under section 43(7)(b) of the 1993 Act), having regard to the guidance given by the Office of the Scottish Charity Regulator ; and
  • to state whether particular matters have come to my attention.

Basis of independent examiner’s report
My examination was carried out in accordance with the general Directions given by the Charity Commission and is in accordance with the good practice guidance issued by the Office of the Scottish Charity Regulator. An examination includes a review of the accounting records kept by the charity and a comparison of the accounts presented with those records. It also includes consideration of any unusual items or disclosures in the accounts, and seeking explanations from you as trustees concerning any such matters. The procedures undertaken do not provide all the evidence that would be required in an audit, and consequently I do not express an audit opinion on the view given by the accounts.

Independent examiner’s statement
In connection with my examination, no matter has come to my attention:

(1)  which gives me reasonable cause to believe that in any material respect the requirements

  • to keep accounting records in accordance with section 386 of the Companies Act 2006; and
  • to prepare accounts which accord with the accounting records, comply with the accounting requirements of the Companies Act 2006 and which are consistent with the Statement of Recommended Practice.

have not been met; or

(2)  to which, in my opinion, attention should be drawn in order to enable a proper understanding of the accounts to be reached.
Name:
Relevant professional qualification or body:
Address:
Date:

Example 5: Examiner’s qualified report - failure to disclose investments at market value (non-company charity)

Independent examiner’s report to the trustees of “ABC” Trust

I report on the accounts of the Trust for the year ended 30 April 2008, which are set out on pages 00 to 00.

Respective responsibilities of trustees and examiner
The charity’s trustees are responsible for the preparation of the accounts. The charity’s trustees consider that an audit is not required for this year (under section 43(2) of the Charities Act 1993 (the 1993 Act)) and that an independent examination is needed and the charity’s income for the year was below £250,000.

It is my responsibility to:

  • examine the accounts (under section 43(3)(a) of the 1993 Act);
  • to follow the procedures laid down in the general Directions given by the Charity Commission (under section 43(7)(b) of the 1993 Act); and
  • to state whether particular matters have come to my attention.

Basis of examiner’s statement

My examination was carried out in accordance with the general Directions given by the Charity Commission. An examination includes a review of the accounting records kept by the charity and a comparison of the accounts presented with those records. It also includes consideration of any unusual items or disclosures in the accounts, and seeking explanations from you as trustees concerning any such matters. The procedures undertaken do not provide all the evidence that would be required in an audit, and consequently I do not express an audit opinion on the view given by the accounts.

Independent examiner’s qualified statement

The Trust held shares listed on a recognised stock exchange as a fixed asset investment with a market value at the balance sheet date of £x. These assets have been included in the accounts at their cost of £y, resulting in their value being understated by £z in the balance sheet. This matter gives me reasonable cause to believe that in this respect the accounts do not comply with the accounting requirements of the 1993 Act.

In connection with my examination, no other matter except that referred to in the above paragraph has come to my attention:

(1)  which gives me reasonable cause to believe that in any material respect the requirements

  • to keep accounting records in accordance with section 41 of the 1993 Act; and
  • to prepare accounts which accord with the accounting records and comply with the accounting requirements of the 1993 Act

have not been met; or
(2)  to which, in my opinion, attention should be drawn in order to enable a proper understanding of the accounts to be reached.

Name:
Relevant professional qualification or body:
Address:
Date:

Example 6: Examiner’s qualified report - a matter to be reported (non-company charity)

Independent examiner’s report to the trustees of “ABC” Trust

I report on the accounts of the Trust for the year ended 30 April 2008, which are set out on pages 00 to 00.

Respective responsibilities of trustees and examiner

The charity’s trustees are responsible for the preparation of the accounts. The charity’s trustees consider that an audit is not required for this year (under section 43(2) of the Charities Act 1993 (the 1993 Act)) and that an independent examination is needed and the charity’s income for the year was below £250,000.

It is my responsibility to:

  • examine the accounts (under section 43(3)(a) of the 1993 Act);
  • to follow the procedures laid down in the general Directions given by the Charity Commission (under section 43(7)(b) of the 1993 Act); and
  • to state whether particular matters have come to my attention.

Basis of examiner’s statement

My examination was carried out in accordance with the general Directions given by the Charity Commission. An examination includes a review of the accounting records kept by the charity and a comparison of the accounts presented with those records. It also includes consideration of any unusual items or disclosures in the accounts, and seeking explanations from you as trustees concerning any such matters. The procedures undertaken do not provide all the evidence that would be required in an audit, and consequently I do not express an audit opinion on the view given by the accounts.

Independent examiner’s qualified statement

In connection with my examination, no matter has come to my attention which gives me reasonable cause to believe that, in any material respect, the requirements

  • to keep accounting records in accordance with section 41 of the 1993 Act; and
  • to prepare accounts which accord with the accounting records and to comply with the accounting requirements of the 1993 Act

have not been met.

The accounts disclose the payment of a material restricted grant of £x to the XXX partner organisation operating in country X. The trustees explained that a trustee took the funds over in US dollar currency in a suitcase and gave the funds to a representative of XXX partner organisation. However the trustees were unable to explain what the funds were used for and were not able to provide evidence by way of receipt or letter of acknowledgment from XXX partner organisation. A concern exists that the grant may have to be repaid because of the lack of evidence available to inform the donor concerning its use.

No other matter has come to my attention in connection with my examination to which, in my opinion, attention should be drawn in order to enable a proper understanding of the accounts to be reached.

Name:
Relevant professional qualification or body:
Address:
Date:

Example 7: Examiner’s qualified report - a matter to be reported (company charity)

Independent Examiner’s Report to the Trustees of “WXY Charitable Company”

I report on the accounts of the company for the year ended 30 April 2008, which are set out on pages 00 to 00.

Respective responsibilities of trustees and examiner

The company’s trustees are responsible for the preparation of the accounts. The company’s trustees consider that an audit is not required for this year (under section 43(2) of the Charities Act 1993 (the 1993 Act)) and that an independent examination is needed and the charity’s income for the year was below £250,000.

It is my responsibility to:

  • examine the accounts (under section 43(3)(a) of the 1993 Act);
  • to follow the procedures laid down in the general Directions given by the Charity Commission (under section 43(7)(b) of the 1993 Act); and
  • to state whether particular matters have come to my attention.

Basis of independent examiner’s report

My examination was carried out in accordance with the general Directions given by the Charity Commission. An examination includes a review of the accounting records kept by the charity and a comparison of the accounts presented with those records. It also includes consideration of any unusual items or disclosures in the accounts, and seeking explanations from you as trustees concerning any such matters. The procedures undertaken do not provide all the evidence that would be required in an audit, and consequently I do not express an audit opinion on the view given by the accounts.

Independent examiner’s qualified statement

The accounts compiled do not fully comply with company law and are not consistent with the charities SORP. A balance sheet and notes are present but instead of a Statement of Financial Activities and an income and expenditure account, only a profit and loss account has been prepared. In neither the profit and loss account nor the balance sheet are the funds analysed between unrestricted and restricted funds. The amount of unrestricted funds held, and detailed in the notes to the accounts, relates to a public collection with balance of £x remaining at the year-end.

In connection with my examination, no other matter except that referred to in the above paragraph has come to my attention:
(1)  which gives me reasonable cause to believe that in any material respect the requirements

  • to keep accounting records in accordance with section 386 of the Companies Act 2006; and
  • to prepare accounts which accord with the accounting records, comply with the accounting requirements of the Companies Act 2006 and which are consistent with the Statement of Recommended Practice.

have not been met; or
(2)  to which, in my opinion, attention should be drawn in order to enable a proper understanding of the accounts to be reached.

No other matter has come to my attention in connection with my examination to which, in my opinion, attention should be drawn in order to enable a proper understanding of the accounts to be reached.

Name:
Relevant professional qualification or body:
Address:
Date:

Appendix 5: What must the examiner do if there is a significant concern about the accounts?

This Appendix outlines how to go about meeting your statutory duty to report matters of material significance to the Charity Commission and sets out those eight areas of concern where we would expect a report to be made to us as the regulator.

Introduction

An examination involves a review of the accounting records kept by the charity and a comparison of the accounts presented with those records. It also involves a review of the accounts and the consideration of any unusual items or disclosures identified. It is important to note that verification and vouching procedures, where an item in the accounts is checked against an original document such as an invoice or a receipt, only becomes necessary where significant concerns are identified from the work of the examiner, or where satisfactory explanations cannot be obtained from the trustees.

A significant concern relates to a matter where the Commission is likely to consider using its enquiry powers. In such circumstances the examiner also has to make a separate report of that matter to the Commission in addition to their examiner’s report. This Appendix explains the legal requirement for that report, what matters to look out for, and provides additional guidance concerning money laundering.

The guidance on money laundering set out is intended for the lay examiner who is not a registered auditor, a qualified accountant or a member of one of the bodies named in Appendix 1 who can undertake the examination of the accounts of a charity with an income in excess of £250,000. For examiners who are members of a body listed in Appendix 1, or who are not registered auditors and examiners, a higher level of awareness is expected of money laundering. Where the examiner is a registered auditor the examiner is also expected to be fully conversant with Audit Practices Board guidance Practice Note 11 and to adhere to the standards set out in that guidance.

The legal duty to make a report of a significant concern of material significance to the Charity Commission

The Charities Act 2006 sections 29 and 33, amend the Charities Act 1993 section 44, and place a duty upon the independent examiner or auditor of both the non-company charity and the company charity to make a report to the Commission in certain circumstances.

A report must be made where in the course of their examination, they identify a matter which relates to the activities or affairs of the charity or of any connected institution or body, and which the examiner or auditor has reasonable cause to believe is likely to be of material significance for the purposes of the exercise by the Commission of its functions under section 8 or 18 of the Charities Act 1993. The Act also provides for statutory protection for the independent examiner or auditor when making such reports.

For examiners who are conducting an independent examination of a charity which is operational and registered in both England and Wales, and Scotland, you are recommended to also refer to the OSCR website for more information as to the reporting duties of examiners in Scotland. Section 46 of the Charities and Trustee Investment (Scotland) Act 2005 imposes a duty to report, where the examiner identifies matters of material significance for the purposes of the exercise of OSCR of its functions under section 28, 30 or 31 of the 2005 Act.

The reporting of a matter of material significance is a separate report from the independent examiner’s report on the accounts. Examples of an examiner’s report are shown in Appendix 4.

The independent examiner and auditor also have a discretionary power, Charities Act 1993 section 44 as amended, to report matters that they believe may be relevant to the work of the Charity Commission but they are not under a duty to report such matters. The Act also provides for statutory protection for the independent examiner or auditor when making such discretionary reports.

For examiners who are conducting an independent examination of a charity which is operational and registered in both England and Wales, and Scotland, there is also a similar discretionary duty to report, section 46 of the Charities and Trustee Investment (Scotland) Act 2005, matters likely to be relevant for the purposes of the exercise of OSCR of any of its functions under the 2005 Act.

How the examiner is recommended to go about making their report

If the examiner does identify a matter of significant then the examiner should:

  • gather together the evidence or information about the matter and make a note of the significant concern(s) identified;
  • in the exceptional and rare situation that terrorism or the involvement of organised crime, for example money laundering, is suspected report immediately to the police and follow their advice before making a written report to the Commission; and
  • in all other circumstances (i.e. not a matter reportable to the Police as terrorism or money laundering) discuss the matter with the trustees to identify what action, if any, the trustees are taking or intend to take to address the matter or to put things right;
  • write out their report noting any action taken or proposed by the trustees; and
  • send the report immediately to the Charity Commission.

Eight matters of significant concern which are of material significance to the work of the Charity Commission and so give rise to a reporting duty for all examiners

There is no requirement for the examiner to set out to find a matter of significant concern but the examiner will have a duty to report where they come across the matter as part of their work in carrying out their independent examination. It is recommended that when planning their examination the examiner keeps the following matters, which give rise to a duty to report, in mind.

By considering the activities of the charity in the year and the evidence gained during the examination, the examiner can then look at the information they have found out and see if they have come across any evidence which means that they have a duty to report to the Charity Commission, and then make their report.

There are eight matters that examiners must consider:

1. Matters suggesting dishonesty or fraud involving a significant loss of, or a major risk to, charitable funds.

Fraud is the act of criminal deception involving covering up by use of false documentation, false explanations or other method the stealing money or assets. The examiner also asked to consider whether dishonesty or fraud is a risk to charitable funds. Whilst the examiner may find evidence that a fraud known to the trustees has been identified and action taken, or as a course of the examiner’s work come across evidence suggesting fraud has taken place, risk involves looking at the circumstances of the charity and identifying if there is a risk to the charity of fraud or dishonesty. Effective internal controls (matter listed number 2 below) help safeguard against dishonesty and fraud.
Note the reference to a significant loss or major risk which means that a report need only be made where the amount involved is significant. Where a fraud, or risk of fraud and dishonesty is not considered significant but the examiner knows a fraud has taken place, or a risk exists for a lesser sum, then the examiner may wish to make a report of a matter relevant to the work of the Commission instead.

2. Failure(s) of internal controls, including failure(s) in charity governance, that resulted in a significant loss or misappropriation of charitable funds, or has led or may lead to significant charitable funds being put at major risk.

The heading of poor governance and internal controls is a broad one. Trustees should be meeting their obligations as set out in our guidance CC3 The Essential Trustee. Also our guidance CC8 Internal Financial Controls for Charities is a useful reference document describing what internal controls are and giving examples of internal controls.
From our regulatory experience the following are common problem areas that might usefully be considered as indicating a problem which merits reporting:

  • Payments to trustees

Prior to the Charities Act 2006, trustees could only be paid where a clause permitted payment in the charity’s constitution or if prior approval had been obtained from the Charity Commission. A trustee can now be paid for providing services to the charity but not for being a  trustee, provided the following conditions are met:

a) there is a written agreement;
b) the trustees have already agreed that it is the best interests of the charity for that person to undertake the work for the amount agreed on the terms of the agreement;
c) only the minority of trustees receive payment of any kind from the Charity Commission; and
d) there is no prohibition in the governing document against trustees being paid for providing services to the charity.

There is still no power to pay trustees to be trustees and any such payment needs the prior consent of the Commission. Payments to trustees should be disclosed in the notes to the accounts for charities preparing accruals accounts and in the annual report of charities preparing receipts and payments accounts or by way of note. Trustees are able to claim reasonable expenses and again details of such expenses should be disclosed. Where trustees are paid, the examiner may need to ensure that any conflicts of interest have been properly managed and full disclosure of what was agreed is noted in the minutes of the trustees’ meetings. The examiner will need to check if any charity trustee (or person connected with a trustee) recei