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Double scrutiny: the value of impact audits

Author: Kristina Kopic, Head of Charity and Voluntary Sector, ICAEW

Published: 14 Sep 2022

The Furniture Resource Centre (FRC) Group is a charitable social enterprise with a mission to end furniture poverty. Unlike most other charities, the FRC Group goes the extra mile by seeking independent assurance of its impact report which forms part of the charity’s annual report.

This assurance engagement is conducted by FRC Group’s auditors and conducted in accordance with International Standard on Assurance Engagements 3000. As a result, FRC Group’s annual accounts include two independent assurance reports: one on the social value generated in the reporting period alongside the financial ‘true and fair’ audit report. I spoke with FRC Group’s Director of Finance and Social, Tony Rowan, to find out what it’s like to have “double scrutiny” and why it’s worth it.

Finding the right audit firm to provide both assurance engagements

When the charity tendered for its assurance provision in recent years, it found that not all audit firms felt comfortable to provide both assurance engagements. FRC’s quantification of its social value challenged some firms that were experienced in financial audits but newer to impact assurance. However, it was important to the charity to include its impact report and the assurance report within its annual report and FRC’s new assurance provider, Crowe UK, understood this. After all, decisions about resource allocation are made to benefit the charity’s service users, and their interests shape what FRC does and what gets measured. That’s why the impact ‘audit’ team is proactively engaging with stakeholder groups as part of their scrutiny.

FRC Group’s annual report includes a valuation of the social impact generated in the year and all assured data points are clearly indicated by a green thumbs-up icon, so readers of the accounts can easily see what has been scrutinised. FRC Group’s auditors send a separate team for the impact assurance work after the field work for the financial audit has taken place. However, the audit report is only approved when both engagements are completed, and no inconsistencies have been identified.

The challenge of measuring social value

The calculation of social value can never be perfect, but, when measured consistently, it gives the charity’s leadership clear insights into the charity’s progress over time. Some activities, such as the impact of campaigning, don’t easily lend themselves to a valuation approach, and the FRC Group is currently measuring only what it can. So, what is the social value of an item of furniture provided to a social housing tenant? The FRC Group developed its social value attribution with help from external consultants and considers both the market value of the item and the difference that an item will make to the recipient’s life.

However, as there is no significant body of established practice in measuring frameworks and techniques, comparability with other organisations is more difficult. FRC Group’s Director of Finance and Social, Tony Rowan, hopes that this will change in time and that the charity’s pioneering impact management and review will encourage other organisations to follow suit so that measurement frameworks will become better established. However, FRC Group’s intention is to focus less on the measurement and more on the management of the charity’s impact. This enables stakeholder-informed, timely decisions that maximise impact.

Data insights on social value, as well as financial value created by the charity’s different activities, help the board and executive leadership team focus on impact while also undertaking activities with a higher financial margin. The charity has a budget for its social value alongside its financial budget and performance against both budgets is measured throughout the year.

Demonstrating accountability: How to get started

Every charity has a responsibility to consider and report the unintended negative consequences of its activities. The FRC team prides itself on transparency in its reporting, acknowledging areas that haven’t quite gone to plan. Its traffic-light icons show clearly how the charity has performed against targets and priorities that had been agreed for the year. The annual report also reports on the charity’s carbon footprint and the diversity of its leadership and board.

For charities at the start of their impact reporting journey, Rowan recommends starting with relevant and reliable metrics before attempting to calculate the social value generated. 

A good starting point is to ask questions which lead to data insights that eventually improve decision-making:

  1. What are the charity’s objects, what are its aims? Trustees need to start with the charity’s ‘why’ to understand whether the charity is achieving its aims.
  2. What does the charity do, what is measurable? There is no need to quantify the social value at the start of the impact reporting journey, but charities should ensure that there is rigour behind data collection, analysis, and reporting.
  3. What are relevant Key Performance Indicators (KPIs) to measure performance? Implement regular reporting mechanisms against relevant impact KPIs.
  4. Are impact results improving year on year? If performance is measured consistently, trustees will be able to see if the charity is making progress.
  5. What can the charity do to address challenges? If the KPIs are showing that the charity is not meeting its impact targets, regular reporting will help the board take timely action.

Who benefits from the impact audit?

According to Rowan, the independent assurance review of the charity’s impact report gives confidence to the board, and it helps FRC Group to demonstrate its public benefit to the charity regulator. He hopes that the additional scrutiny will also set the charity apart from competitors in the future, for example when tendering for contracts with social housing providers and local authorities. However, at present, the charity’s customers and most of its stakeholders pay limited attention to the assurance report.

So why is an impact audit worth the investment of time and money? Rowan says that in addition to reassuring the board and the Charity Commission, the impact audit ensures that a lot of rigour goes into the impact report, and therefore decision-making is based on sound evidence. Moreover, the growth in social value year-on-year is a great motivator and source of pride for the charity’s team: “When we get to the end of our financial year, we publish our financial results but more importantly we can see that our social value has gone up by, say, 20 percent compared to last year. That’s a real result, that’s what we’re here to do.

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