The Regulator for Charities in England and Wales
The Charities Act 1993 created the independent examination regime, intended as a comparatively light touch and proportionate external scrutiny of the accounts of smaller registered (and excepted) charities. Due to company law, the regime did not cover company charities, and small company charities often escaped scrutiny altogether, or where their gross income was £90,000 or more, were subject to a simple form of scrutiny, termed an accountant’s report (or audit-exemption report). An accountant’s report could only be provided by persons who were members of a body specified by legislation.
The Charities Act 1993 provides the legal powers for the Commission to give guidance to charity trustees in selecting an independent examiner and to establish the legal Directions as to how an independent examination is to be carried out (Charities Act 1993 section 43 (7)). The form and content of the independent examiner’s report is set out separately in The Charity (Accounts and Reports) Regulations which are subject to a separate consultation exercise.
An independent examination provides a form of external scrutiny which is less detailed and less expensive than an audit, and is designed to be undertaken by both accountancy practitioners and others with the requisite ability and practical experience. The Directions are proportionate, and allow a simpler scrutiny of receipts and payments accounts, compared to the more complex accruals accounts, which require familiarity with accounting principles.
Changes to charity and company law following the Charities Act 2006 and the Companies Act 2006, will ensure that the independent examination regime applies equally to both small company and non-company charities. During the passage of the Companies Act, a limited consultation was undertaken with accountancy bodies and key stakeholders by the Home Office and the Department of Trade and Industry and all were supportive of the proposed change to permit the independent examination of small company charities. However the current Directions need to be adapted to accommodate small company charities.
The table shows the number of registered charities (as at January 2007) subject to each type of regime and contrasts the current regime with the regime applying once the changes introduced by the Companies Act 2006 and section 77 of the Charities Act 2006 come into effect.
There is a separate consultation exercise on the implementation of section 77 of the Charities Act 2006 and associated Regulations which will give effect to independent examination of small company charities, amongst other changes.
| Scrutiny regime |
Current Regime |
Registered Charities |
Estimate for all charities |
| No scrutiny |
101,357 |
95,123 |
157,819 |
| Companies Act accountant’s report |
4,879 |
- |
- |
| Independent Examination |
48,684 |
64,939 |
100,492 |
| Statutory audit |
13,697 |
8,555 |
10,306 |
| Total main charities |
168,617 |
168,617 |
268,617 |
The table shows that once all the changes are effected, the independent examination regime will cover 64,939 registered charities (39% of the registered charity sector). Assuming there are roughly 100,000 currently excepted and exempt charities and that these charities have the same income profile as non-company charities, the estimate for all charities indicates 100,492 will be subject to independent examination.
Comment is invited on both the draft Directions and on the associated guidance. The associated guidance is in two parts, firstly the guidance interpreting each Direction and secondly the appendices.
The revised Directions and guidance expand upon the original guidance issued in 1993, Independent Examination of Charity Accounts directions and guidance, reflecting the broadening of independent examination to small company charities and the new statutory duty to report certain ‘matters of material significance’ to the Commission.
During the passage of the Charities Act 2006, a commitment was given that all the financial thresholds would be subject to a further review within 12 months of the passage of the Act. The intention is to review and reduce, where possible and appropriate, the regulatory burdens upon charities.
It is proposed to include the lower and upper thresholds for independent examination in this review. The income threshold above which an independent examination is required is currently £10,000 and was last reviewed in 1995. The upper threshold for independent examination, above which an audit is required is £500,000 gross income and was last changed on 27 February 2007 following the Charities Act 2006. Any changes in thresholds, including thresholds for independent examination, will be subject to a separate consultation exercise.
We would value feedback and welcome comments on the draft Directions and guidance and the key changes, particularly on the following points:
1. Do you think the draft Directions reflect the minimum changes necessary to enable the independent examination of small company charities?
2. Do you think the guidance associated with each Direction clearly explains what is required in terms that a non-accountant with the requisite skills and experience can readily understand?
3. Do you think the guidance on the selection of examiners is sufficiently clear?
4. Do you think the new statutory duty to report matters of material significance to the Commission is clearly explained and reasonably interpreted?
5. Do you think the appendices are sufficiently comprehensive in providing the information an independent examiner needs?
6. In particular does Appendix 4 provide a sufficient coverage of independent examiner’s reports?
7. Also do you think Appendix 5 is helpful in explaining when matters should be reported to the Commission and is the additional guidance on each area tested is clear and helpful?
8. Is the greater expectation of independent examiners who are members of a designated body, set out in Appendix 5, fair and reasonable?
9. Overall, is there any matter you consider is omitted which should be included, and is there any matter included which is best removed?
10. The Commission intends to issue the final guidance via the publications web page. Do you believe hard copy availability is necessary?
You may submit your comments on these points:
John Kerry
Charity Commission
Woodfield House
Tangier
Taunton
Somerset TA1 4BL; or
Responses are requested by Friday 16 November 2007.
Where appropriate we encourage you to provide evidence to support your response. If you are a representative group, it would be helpful if you could provide a summary with your response of the people and organisations that you represent.
Please note that responses, including the name and address of respondents, may be made public unless confidentiality is specifically requested.
We will consider the responses received in finalising the Directions so that independent examination can be fairly applied to both company and non-company charities alike. We will review the guidance to take on board constructive criticism and suggested changes or amendments, so that independent examiners are well equipped to undertake the independent examination of company and non-company charities.
The key changes section of this document reviews each direction and appendix in turn and highlights the changes made and the reason for those changes.
If you have any further queries about this consultation, please contact:
Nigel Davies
Charity Commission
Woodfield House
Tangier
Taunton
Somerset TA1 4BL
Telephone: 01823 345470
If you have queries about any other aspect of the Commission’s work or would like to order any of our publications, please telephone Charity Commission Direct on 0845 300 0218.
This consultation has been designed to comply with the six consultation criteria in the Cabinet Office Code of practice on Consultation. If respondents have comments or complaints about the consultation process they should contact:
John Kerry
Charity Commission
Woodfield House
Tangier
Taunton
Somerset TA1 4BL
The key changes are divided into three sections, the draft Directions, the guidance on the draft Directions and the appendices offering additional guidance.
Not all of the proposed Directions have changed from the existing Directions. Where possible, to keep regulatory burdens to a minimum and keep any changes to the absolute minimum necessary, the existing Directions have been retained.
The following Directions have been revised to take account of the extension of independent examination to company charities and to reflect the new statutory reporting duty, following the Charities Act 2006.
Direction 1 (Examination and Accounting Thresholds) is changed to require the examiner to ensure that a company charity qualifies both as a small company and for independent examination threshold purposes.
Direction 5 (Accounting Records) is changed to require the examiner of a company charity to ensure accounting records have been kept in accordance with company law.
Direction 7 (Form and Contents of Accounts) is changed to require the examiner to check whether the format of the accounts prepared by a company charity or a non-company charity are consistent with the SORP.
Direction 8 (Accounting Policies, Estimates and Judgements) is changed to require the examiner to check as to whether the accounting policies for accounts prepared on an accruals basis are consistent with the SORP.
Direction 9 (Events Subsequent to the Year-End) is extended to apply also to small company charities.
Direction 10 (Consistency of Annual Reports with the Accounts) is extended to apply also to small company charities.
Direction 11 (Examiner’s Report) is updated to refer to the relevant regulation in the draft Charities (Accounts and Reports) Regulations 2007 and company law.
Direction 12 is withdrawn and replaced by a statement of the reporting duty imposed by sections 29 and 33 of the 2006 Act.
The 2006 Act amends the Charities Act 1993 and creates a new legal duty for independent examiners. Where someone acting as an independent examiner becomes aware of a matter during the course of their examination, 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 of material significance for the purposes of the Commission in the exercise of its inquiry functions, they must then make a written report to the Commission.
To assist the examiner in interpreting this reporting duty, the non-statutory guidance endeavours to place the duty in context and explains how to make a report and also offers advice on the discretionary power of examiners (and auditors) to make a report provided for in the Act.
Direction 1 (Examination and Accounting Thresholds) has been updated for the extension of independent examination to small company charities and notes the new requirement to disclose the circumstances where an independent examination is conducted instead of an audit.
Direction 2 (Understanding the Charity) is expanded to cross refer to appendix 5 and to emphasise that normally confirmation of matters through discussion is sufficient but in certain circumstances further checks may be necessary.
Direction 3 (Documentation) now clarifies that it is likely only to be in exceptional circumstances that written confirmation of matters will be required of trustees.
Direction 4 (Comparison with Accounting Records) has been modified concerning the involvement of the examiner in accounts preparation.
Direction 5 (Accounting Records) has been updated for the extension of independent examination to small company charities and notes the accounting records required by company law.
Direction 6 (Analytical Procedures) is substantially unchanged.
Direction 7 (Form and Content of Accounts) has been updated for the extension of independent examination to small company charities and notes that where a separate income and expenditure accounts is prepared, it should be consistent with the Statement of Financial Activities.
Direction 8 (Accounting Policies, Estimates and Judgements) has been updated for the extension of independent examination to small company charities to highlight that consistency with the SORP ensures the accounts are “true and fair”.
Direction 9 (Events Subsequent to Year End) has been updated for the extension of independent examination to small company charities.
Direction 10 (Trustees’ Annual Report) has been updated for the extension of independent examination to small company charities with reference to the requirement for a directors’ report.
Direction 11 (Examiner’s Report) has been updated for the extension of independent examination to small company charities with references to Companies Acts requirements.
Direction 12 (Reports to the Charity Commissioners) has been withdrawn and replaced by guidance on the new statutory duty to report.
Appendix 1 (Guidance on the Selection of an Examiner) has been updated for the new category of examiner of charities with an income exceeding £250,000.
Appendix 2 (Calculation of Gross Income) has been updated setting out our current administrative definition of gross income.
Appendix 3 (Flowchart indicating Eligibility Requirements for Independent Examination) replaces the previous Appendix 7, and has been adapted to reflect the extension of independent examination to for small company charities.
Appendix 4 (Reporting Duties under the 2005 Regulations and Examples of Examiner’s Reports) has been updated and additional example reports for company charities and charities operating in England and Wales and Scotland have been added.
Appendix 5 (Examples of matters which are of material significance to the Charity Commission, giving rise to a legal duty to make a report to the Charity Commission) replaces the previous guidance which gave examples of deliberate and reckless misconduct. The new appendix explains the statutory duty to make a report to the Commission and the discretionary power to make a report and gives examples of four areas where a statutory duty may rise and provides model reports. The appendix also details common potential problem areas for small charities to assist the examiner to plan their examination and analytical review.
Appendix 6 (Glossary of Terms) has been updated.
Appendix 7 (Sources of Further Information) has been updated.
Appendix 8 (Additional Company Law Reporting Requirements for Small Company Charities) is a new appendix reflecting the extension of independent examination to for small company charities which summarises the additional company law requirements for small company charities.