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Understanding the charity: the key to independent examinations

Author: ICAEW

Published: 01 Sep 2021

This year’s Quality Assurance Department (QAD) monitoring reviews are focusing on assurance reports, including independent examination reports (IERs) on charities. We look at the issues the reviewers are interested in, where the pitfalls lie, and how can you avoid them.

The way in which charities are run and regulated is always subject to intense public and media scrutiny, so accountancy firms working in this area need to be aware of the risks and ensure they carry out and monitor their work in line with statutory and other requirements.

Independent examinations play a crucial role in assuring the public and other stakeholders that charities are upholding high financial standards and meeting the obligations imposed by the Charity Commissions .

To support this, QAD’s 2021 focus on Assurance and other reports includes IERs. In particular, reviewers are looking at the procedures larger firms have in place for IERs, how they record and monitor work done, and staff competence.

Understand the charity

A thorough understanding of the charity and its objectives lies at the core of the Independent Examination. “You need to understand why the charity was set up, and how the trustees are meeting that charitable objective,” says Angela Freeman, Manager, Professional Standards, Quality Assurance, ICAEW. “And that means communicating with trustees regularly.”

Ahsan Miraj, Head of Audit and Assurance, Bright Grahame Murray, agrees. “Fundamental to all of this is an understanding of the charity, how it operates, its objectives, its trustees, and the controls and processes it has in place,” he says. “Then you can plan your work accordingly.”

It’s not only important to have an initial grounding in the charity’s work, but also to continue to build on that knowledge. “It’s having an ongoing dialogue through the year,” stresses Miraj. “You need to find out what is happening, what has changed and what kind of fundraising is going on.” This includes engaging with trustees. “The dialogue with trustees is an important aspect of meeting the reporting obligations,” he notes.

Professional scepticism

If you fail to understand the charity you’re dealing with, it has knock-on effects on compliance. “The more you understand the entity you’re looking at and have a good feel for its purpose and business model, the easier it is to spot things that look a bit unusual, and to apply the appropriate level of professional scepticism,” explains Kevin Sharman, QAD Reviewer, ICAEW. “If you don’t understand it, how do you know what looks correct and what might look odd and needs further questioning?”

On the flipside, as an independent examiner you must also be sufficiently independent. “If you are connected or overly familiar with the charity, it can be a problem too,” says Sharman. “So there needs to be a balance. You must understand the charity, but not be overly familiar; you need to be independent.”

The Charity Commissions offer guidance on independence, but there is also an element of judgement involved. “The key thing is that, if anything is borderline, firms show they’ve thought about it,” says Freeman. “And they have documented why they think they’re independent enough to continue.”

Size matters

Whether a charity needs an independent examination, a full audit, or no formal external financial scrutiny largely depends on its size. To meet statutory requirements, it is critical that the firm makes sure it is carrying out the correct level of scrutiny. On the face of it, this might seem simple because the size (based on income ) thresholds are clearly laid down.

There are, however, things to watch out for. For example, criteria and thresholds can differ between England and Wales, Scotland and Northern Ireland. And each charity also has its own governance documents, which might specify an audit, even though the charity does not meet the current audit threshold.

“For some charities, if their governing documents are quite old, there can be an element of confusion,” explains Miraj. “Some refer to a requirement for ‘audit’ rather an independent examination, which leads to confusion about what is required.”

“These are the common things that catch people out,” says Freeman. “Or there could be something that is a one-off,” she adds. “Sometimes a charity might have a large increase in income in one year – perhaps from an unusual donation or legacy. And that could flip it across into a different category, but the firm misses that and carries out the wrong process.”

The COVID-19 pandemic has added to this uncertainty. Over the last 18 months, many charities have suffered a significant hit to their fundraising capabilities, and therefore their income. “We’re seeing this from charities,” says Miraj, “so they may be falling below the audit threshold and into the independent examination category.”

This can pose its own challenges. “If income then goes back up the following year, the work carried out in an independent examination is not as elaborate as a full audit, which can cause potential issues with comparative information later on,” he explains.

Recording work

Another area where firms can encounter problems is in not recording the work they’ve done in sufficient detail. “Generally, we find that work is being undertaken,” says Sharman. “But firms are not always so good at recording it.”

A structured work programme can help. “If you have this, you’re more likely to document it properly,” he explains. “A work programme can make it clear that you understand the charity and interact with the trustees, and then document the work you carry out and how it meets the requirements in the Charity Commission’s directions.”

For Miraj, a systematic approach is critical. “We use work programmes when we embark on an independent examination,” he explains. “And that work programme takes us through the process in an organised way, and addresses the various directions set by the Charity Commission, including ensuring background information is up-to-date, and that we’ve looked at all the independence and ethical issues.”

Read the guidance

All firms should be familiar with the Charity Commission’s directions and guidance for examiners. “People might have been doing this type of work for years,” says Freeman. “They may think they know how to do it and so have not looked back to those directions or thought recently about what the Commission expects.”

“Firms can fail to report matters of material significance to the Charity Commission,” adds Sharman “So you need understand what matters you may have to report..” Some are straightforward common sense issues – such as identifying criminal behaviour. Others outlined in the directions are less obvious.

“If, for example, the Charity Commission put a regulatory order over the charity and the charity didn’t act on it, you have to report it,” explains Sharman. “And if there are related-party transactions and they’re not being fully disclosed, you have to report that as well.”

Another common failing is inadequate training for staff carrying out independent examinations. “Think about who is actually doing this work at the firm,” advises Freeman. Some larger firms have strict rules that only people with charity audit experience can do independent examinations, and they back this up with appropriate training. “But other firms might allow anyone to do it,” she says. “So they might not have quite the same level of expertise.”

“We always have specialists doing it,” says Miraj. “Not all our partners will get involved in this work – it’s only those who have requisite experience of charity law.”

Where someone is unsure about an issue, or has any questions, he recommends calling ICAEW’s helpline. “For any technical difficulties relating specifically to charity law, we speak to the Charity Commission,” he says. “But for general queries, we’ll ask ICAEW.”

“Firms should never see an IER as simply a signing off exercise,” concludes Freeman. “It’s not just about receiving a box of documents; you should think carefully about the charity’s purpose, how it operates, whether you are sufficiently independent, and how you can engage effectively with the trustees.”

Resources

QAD reviews of IERs

Some of the key issues QAD reviewers are looking at in 2021 include whether a firm:

  • has checked that the charity is eligible for an IER and doesn’t require an audit
  • is sufficiently independent to carry out the work
  • understands the purpose of the charity and how it operates
  • has done sufficient work to meet the requirements of the Charity Commission directives, and has clear procedures and methods of recording work
  • has adequate quality control processes (these will vary depending on the size of the firm)
  • has provided sufficient charity-specific training for members of the team

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