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‘Restoring trust in audit and corporate governance’ – ICAEW responds to BEIS consultation

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

Published: 03 Sep 2021

The ICAEW has published its response to the BEIS consultation ‘Restoring trust in audit and corporate governance’ but what was its take on the definition of a Public Interest Entity (PIE) and how does this compare to the Charity Commission’s response?

Read ICAEW's response here.

Definition of PIE

The BEIS White Paper asked whether the government should seek to include large third sector organisations as PIEs. Ian Wright, ICAEW’s Managing Director, Reputation and Influence, warned that the entire ecosystem of audit, assurance and regulation may topple over if the number of entities being brought into the system doubled as a result of the wider definition of PIEs.

ICAEW’s consultation response makes clear why charities should not be defined as PIEs (paragraphs 99-102 of the response):

“Government should give careful thought to the entities it intends to catch in the increased governance and reporting requirements for PIEs. We would not expect third sector entities to be included in a regime designed to identify commercial entities.”

The consultation response agrees that it is vital that charities are subject to appropriate reporting, audit, and governance due to their public interest nature. It points out that the regimes for charities do not need to be the same as those applied to commercial entities because charities are already registered and regulated by the Charity Commission.

“The Charity Commission also issues guidance relating to the strengthening of corporate governance and management on matters such as internal controls and managing difficulties and insolvency. Charity law also applies in addition to company law for corporate charities.”

The consultation response adds that “due to the diverse nature of charities – their structure, activities, and funding – setting thresholds based on size would be too blunt” because the different funding models impact on the level of public interest. It also warns of unintended implications:

“Imposing incremental responsibilities on Trustees and Directors and increasingly the complexity of regulation could deter volunteers and hinder diversity efforts on charity boards. The additional cost of compliance with the PIE regime would reduce available funds for good causes, as well as create unintended consequences with charities seeking to avoid merging, for example, to ensure they do not fall within the PIE definition.”

Charity Commission’s response

The Charity Commission response to the BEIS consultation agrees that charities should be excluded from the definition of PIEs and associated corporate reforms. It argued that there was no evidence that risks and problems were more prominent in the charitable sector and warranted introducing the extensive additional regulatory burden and financial cost on the sector that inclusion in the PIE regime would bring. The Charity Commission summarised the existing charity governance and reporting framework, including the additional disclosures required by the Charities SORP (FRS102), the lower audit threshold and the external scrutiny provided by independent examination.

The Charity Commission also highlighted that the auditor and examiner reporting regime and the serious incident reporting enables the Commission to assess issues and engage with charities as necessary: “This reporting is over and above what is required in the private sector and the powers intended for the new Auditing Reporting and Governance Authority (ARGA).”

The regulatory powers that the Charities Act bestows on the Charity Commission are far reaching and effective and the Commission believes that the existing framework is fit for purpose. It warns that ARGA, while expert in corporate reporting, lacks the required knowledge of the duties of trusteeship, charity law and the experience of the sector to effectively oversee charities.

For an update on charity auditing, please join our webinar An update on charity auditing – looking back and looking forward which covers the implications of proposed audit reforms for charity auditors. Our speakers Sudhir Singh and Stuart McKay, both Partners at MHA, will also share experiences and practical lessons of applying revised International Standards of Auditing 540,570, and 700. Book your free ticket here.