Under charity law, charities are subjected to two different forms of external scrutiny -independent examination and audit. We are often asked by charities to undertake an audit of their accounts when they really need an independent examination. Independent examinations and audit are important services we offer to small charities here at Charity Accountant.
Audits are more thorough than Independent examinations. The level of assurance and scrutiny, therefore, is more in an audit than an independent examination. This is why, some trustees prefer to have an audit.
So why would you go for an independent examination? Well, the answer is simple. It is far less costly than an audit. If you are happy to trade off the comfort of an audit assurance and don’t need detailed scrutiny, an Independent Examination is the best option. But before you go ahead with it you should answer this question.
How much do you really know about Independent Examination?
On this page you will learn all about this crucial service. What it actually is, who needs it, who is qualified to do it and how it compares to an audit.
What is an Independent Examination of charity accounts?
An independent examination is a simple form of external scrutiny carried out by a person independent to the charity. The examiner essentially checks whether the accounts agree to charity’s underlying accounting records. And whether accounting rules and regulations applicable to charities have been followed in preparing the accounts. See below for more about who can be appointed as examiner.
An audit on the other hand, is an in-depth scrutiny where an independent auditor must also verify the correctness of underlying records. The auditor must additionally verify that accounting principle and standards have been followed when recording transactions in primary books of entry. This is done by way of sample testing of transactions and financial and accounting internal control procedures.
Most small charities do not need such in-depth scrutiny and added costs. An independent examination is a preferred alternative because it still provides trustees, funders, beneficiaries, stakeholders and the public with an assurance that the accounts of the charity have been reviewed by an independent person.
Who Needs an Independent Examination?
There are a few charity independent examination thresholds you need to keep in mind which are set out below.
Firstly, if your charities gross income is below £25,000 you do not need any form of external scrutiny.
Most charities fall is this second category. If your charities gross annual income is over £25,000 you must have an independent examination. However, the only exception to this is where an audit is required by the charity’s constitution or funders. If you are unsure, then the first thing you need to do is get hold of your constitution or grant agreement and read the provision about annual accounts. In some cases, trustees may also decide to have an audit.
However, if your charity falls into either if these two types, an audit is the only option available to you. 1) Charities with gross annual income over £1mn. 2) Charities with gross assets in excess of £3.26mn. and gross annual income over £250,000.
Who can be an Independent Examiner for charity accounts?
Not all accountants are eligible to act as approved independent examiners. Conversely, in certain cases, not all independent examiners have to be qualified professional accountants. The trustees are responsible to ensure that a competent independent examination takes place. So, it is up to them to decide who can undertake a competent examination. Charity Commission has issued guidance for charities to help them decide who is eligible to act as an independent examiner.
Firstly, as the name suggests, the examiner must be independent. They cannot be someone who has any close connections with the charity, like a trustee, employee, volunteer etc. They also cannot be a close relative of anyone closely connected with the charity, like spouse etc.
Secondly, the examiner should be financially aware and have required ability. For accounts prepared on Receipts and Payments basis the examiner does not need to be professionally qualified. However, they should have the necessary skills and practical experience required to undertake an examination.
Lastly, if your charity’s income is over £250,000 you must appoint an approved independent examiner. You also need an approved independent examiner if your charity accounts are prepared on accruals basis. Here is the list of approved professional qualifications specified by Charity Commission.
Are your independent examiner and accounts are any good?
In a report published on 20 December 2018, Charity Commission stated that only 70% of the accounts (105) that they reviewed, met their basic quality benchmark. This means that 30% of the accounts and trustees report submitted to the regulator are significantly lacking and do not adhere to the guidance.
Therefore, it is not a surprise that we often come across accounts prepared and examined by qualified and non-qualified examiners that are incorrect due to basic accounting errors. Most such accounts lack basic disclosures required by Charities Act and do no comply with Statement of Recommended Practices for Charities (SORP). One classic example is about a church that was using a pro bono examiner to prepare accounts. The examiner and treasurer thought they were preparing receipts and payments basis accounts when actually they were using accruals basis. So not only were the accounts incorrect, trustees were also in breach of guidance issued by Charity Commission by not appointing an approved independent examiner. Neither the trustees nor the examiner realised that the accounts were incorrect or that they were in breach until we informed them.
How can Charity Accountant help?
Most trustees are not themselves financially savvy, so it cannot be expected of them to know whether the accounts are correct and comply with charity law. But they must adhere to Charity Commission guidance (here) and cannot escape from their responsibility of appoint someone who understand charity accounts; someone who can help them fulfil their responsibility of preparing accurate accounts.
We, at Charity Accountant do just that and are here to answer any questions you may have. If you would like us to review your accounts for free email us your accounts and we will give you feedback. We completely understand that charities with limited resources may think of the cost of independent examination as unnecessary. So, when someone is available to do it for free, they would be your first preference. But we invite you to ask us for a quote for independent examination and you may not regret it! Good examiners are good value for money.
Difference between an Independent Examination and an Audit
There are major but subtle differences between an independent examination and audit. Below is a quick summary of some important differences.
|An audit provides ‘positive assurance’. This means that the charity’s accounts give a fair and true view of the charity’s finances.
|Whereas, an independent examination provides ‘negative assurance’. It provides assurance that nothing was found to suggest that the charity’s accounts are wrong or inaccurate.|
|An audit is an in-depth process which involves more work for both, the auditors and charity staff.||Independent examination is relatively less work for both, especially because of lower level of scrutiny|
|Audit can only be conducted by a professionally qualified registered auditor||On the other hand, independent examination does not always have to be conducted by a professionally qualified person|
|It costs a lot more to have an audit than an examination.||Independent examination is less expensive and also provides a certain level of assurance to external stakeholders|
Charity Commission have prepared a simple flowchart for eligibility requirements for independent examination (here) that can help trustees decide on whether or not the charity can opt for one.
If you would like a no obligation fixed fee quote please complete the details below and give us a brief idea about your charity (for example- turnover, charitable activities) and your requirements. For detailed list of our services click here.
Comments or questions are welcome.