Firms carrying out charity audits have a legal duty to report modified audit opinions to the charity regulator, yet levels of reporting remain surprisingly low. This is worrying from both a compliance and practical perspective. Not only are these reports legally required, they also provide charity regulators with vital financial intelligence, helping to root out problems early on and strengthen public trust.
Under the Charities Act 2006, auditors (and independent examiners) of charities must report matters of material significance (MoMS) to the UK charity regulators. The current guidance published in 2017 outlines nine categories of MoMS, although auditors should also report issues not on this list if they feel it is appropriate.
The categories include headline matters relating to dishonesty and fraud, money laundering, governance failures, and risks to the charities beneficiaries. They also include the duty for auditors to report when they make a modified audit opinion (item eight).
When the Charity Commission for England and Wales looked at compliance with item eight over six months in 2017 it found that auditors of 114 charities gave audit opinions that should have triggered a MoMS report, but only a quarter (28) reported it to the regulator. A follow-up study in 2020 found that just 53% of 354 expected reports were received.
This is an encouraging improvement in reporting, particularly in the context of the pandemic and related social and economic upheavals. But it is a long way from the levels expected, and the Charity Commission is concerned and disappointed that it is still not receiving almost half the legally required reports.
“The figures have gone up” says Nigel Davies, Assistant Director of Accountancy Services at the Charity Commission. “But this is still not where we want it to be. The evidence would seem to be that the general awareness is there, but there is something missing, meaning that reporting to the regulator is not always completed in practice.”
One of the key benefits of reporting is increased financial intelligence, which the Commission can then use to improve regulation of the sector and to get an early indication of where there may be individual problems within charities or wider systemic issues within the sector.
Where firms do report, and do so in a timely way, they can really make a difference. “We get excellence intelligence from ICAEW firms,” stresses Davies. “It’s really valuable to us.”
He points to a recent high profile case involving The Alternative Animal Sanctuary. It was an ICAEW firm that first alerted the Commission to problems, and the information received, together with issues uncovered during a subsequent investigation, ultimately led to the charity’s closure in 2021 and action being taken against two of the trustees.
The majority of reports are used for broader intelligence purposes, rather than requiring immediate regulatory action, however. For example, reports on modified audit opinions can help highlight or confirm emerging risks in the sector. The impact of the pandemic on the financial sustainability of the sector is one of these. “It seems the sector is weathering it quite well but the latest information we have indicates a proportion of charities are facing financial issues,” says Davies.
Timely reporting is crucial. “If auditors are giving information on ‘material uncertainty related to going concern’ before their clients even file – bearing in mind charities have 10 months to file, and some file late – it gives us front foot intelligence to enable us to decide if we want to engage with that charity and if we’ve got a pattern of issues to monitor,” explains Davies.
“It’s all related to risk,” says Amie Woods, Head of Accountancy Policy and Analytics at the Charity Commission. “So once we do our risk assessment on a particular event, that’s when we’ll decide whether to escalate things. And we won’t just look at the report alone; we’ll look across other things too.”
Woods notes that there have been cases “where we should have had a MoMS report, and we’ve picked up on an issue in other ways. But if we’d have known about it at an earlier time from the audit firm, then perhaps we could have helped that charity get back on track.”
As with MoMS more generally, some auditors can be under the misapprehension that the charity should be allowed to report first. “That really goes against what we’re trying to achieve,” says Woods, “because we really want timely information.”
Another common misconception is that ‘the charity told you, so we don’t have to.’ “But we want the report from both the auditor and charity, and we expect it from both. Having the auditor’s perspective is helpful and different to that of trustees,” she stresses. “It doesn’t somehow discharge the audit firm’s duty to report if the charity itself has reported.”
On the checklist
Although misconceptions may be part of the reason for inadequate reporting levels, the other contributing factors are unclear. What is clear, however, is that reporting needs to improve.
The results from the 2020 survey provide a wake-up call for firms to review standard audit procedures for this and the eight other MoMS to ensure they are not overlooked. “Your charity audit procedures need to include the nine items of material significance to be reported,” advises Nick Reynolds, senior manager quality assurance, ICAEW.
“Each of the nine items should be set out in your completion checklists,” he says. “You need to consider each one, record whether or not it is applicable and, if it is applicable, make the report.”
“If these checklists are in place, completed and followed up on correctly then, in theory, reporting would happen as intended,” he adds. “The commonly used commercially available audit programmes for charities include these prompts as a matter of course.”
A bigger picture
The Charity Commission’s study focused on reporting of modified audit opinions. This is an area where it is easy for the regulator to cross check other records and identify the shortfall accurately. But the findings should alert all firms involved with charity audits to the importance of MoMS reporting right across the nine areas.
“If we’re not seeing compliance across the board, what other reports are we not seeing?” asks Woods. “And that’s a concern from the regulatory point of view.”
“Ultimately, it’s about improving public confidence because we know from our research that the public are interested in charities making a difference, using their money wisely and run well,” says Davies. “So we want to enhance the role ICAEW firms can play in supporting public confidence in charities. If the firms do well; the charities do well.”
Reportable matters of material significance (MoMS)
- Dishonesty and fraud
- Internal controls and governance
- Money laundering and criminal activity
- Support of terrorism
- Risk to charity’s beneficiaries
- Breaches of law or the charity’s trusts
- Breach of an order or direction made by a charity regulator
- Modified audit opinion or qualified independent examiner’s report
- Conflicts of interest and related party transactions
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