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ICAEW pushes for charity audit threshold consultation

Author: ICAEW Insights

Published: 28 Mar 2024

Call for review of charity audit thresholds as inflation drags many smaller charities into scope against a backdrop of harsh financial challenges across the third sector.

ICAEW is urging the government to push forward on a proposed consultation that could see the audit thresholds for charities increased and reduce the administrative burden for hundreds of organisations in the third sector.

Charity audit thresholds were last updated nine years ago, following a consultation in 2015. Currently, audits are required by charities with a gross annual income exceeding £1m, or gross annual income exceeding £250,000 and year end aggregate value of assets exceeding £3.26m. 

In a letter to Rt Hon Stuart Andrew MP, Minister for Civil Society, ICAEW Chief Executive Michael Izza said recent inflation was dragging many smaller charities towards current audit thresholds, an effect he described as “disproportionate” especially given the other financial pressures they faced. “ICAEW would like to see this consultation taken forward before the end of this Parliament,” Izza said.

Growing demand and sustained financial challenges are leading half of charities to say they are at full capacity and cannot help anyone else, according to research from the Charities Aid Foundation (CAF) published in January, with one in seven saying they are having to turn away people in need.

Nearly two-thirds of charities say they are having to do more with less compared to a year ago, two-fifths are using their reserves to meet operational costs and a similar amount (38%) are asking funders for help with increased costs, the CAF research found. 

ICAEW also believes that a consultation on the audit threshold would support the need for proportionate and effective regulation in line with the Charity Commission’s recently published strategy for 2024-2029. 

Izza also warned in the letter of a potential shortfall of suitably qualified charity auditors as a factor worthy of consideration. “The audit profession is facing increased demands in other sectors (including the audits of public interest entities and local authorities) and the requirements of regulators and standards setters have grown more exacting in recent years. 

“It cannot be assumed that market pressures alone will lead to an increase in the supply of suitably skilled auditors in the charity sector or materially reduced audits costs for charities in the short term.”

Most charities in England and Wales fall way below the current charity audit thresholds; according to the Charity Commission, out of a total of about 170,000 charities, around 156,000 had annual income below £500,000 and around 5,000 were in the £500,000-£1m income band. 

Nevertheless, around 5,700 charities fall into the £1m-£5m band. ICAEW argues that if the current thresholds were to be increased by inflation on a compounded basis from 2015, a significant percentage of these – several hundred charities at least – would be removed from the requirement to have an audit. 

While some of these might decide to continue on a voluntary basis, for the others the resultant reduction in audit fees incurred and time spent in preparing for and participating in an audit would be welcome and the outcome would be more proportionate for the sector. 

The accounts of charities with income between £25k and £1m are subject to an independent examination – another, less rigorous, form of independent scrutiny that can be performed by people who are not qualified auditors. Professional fees for performing independent examinations are typically substantially lower than fees for auditing comparable charities, as is the amount of time required by charity staff to prepare for and participate in the relevant process. 

Izza said ICAEW would welcome the opportunity to comment on more imaginative or radical approaches for reform and ways to simplify and “future-proof” regulation of this nature.

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