On 19 December 2014, the government responded to the consultation on audit and independent examinations for charities, with a “plan to pursue proposals that include increasing the following thresholds from £500,000 to £1 million”. This new threshold will take effect for accounting periods ending or after 31 March 2015 and will affect charities in relation to:

• income threshold at which a charity should have its accounts audited
• aggregate group income threshold at which parent charities should have group accounts audited
• preparation threshold for group accounts

But what does this mean for charities exactly?

Well, for most charities with total income of up to £1,000,000 there is the choice of having an independent examination of their accounts rather than a full audit. The technical view of an independent examination versus an audit is that a statutory auditor is required to a “positive opinion” as to whether or not the statutory accounts give a “true and fair view”.

By contrast, an Independent Examiner forms a “negative opinion” that states (if this is indeed the result of their work) that no evidence of lack of accounting records or compliance of the accounts with those records.

There are other matters that both an audit and independent examination make statements on, and the use of “positive” and “negative” assurance terminology in technical language can be misleading (as if “negative assurance” is somehow a bad thing! It is sometimes helpful to think of the two simply in terms of an audit making a statement that there is evidence to confirm one way or the other, but an Independent Examination stating that there has been no evidence found for lack of…

Benefits of an independent examination

In order to form the positive opinion that is required of the statutory auditor, they need to perform significantly more testing and review than is generally required of an independent examiner, in order to obtain the evidence that supports that opinion.

The “lighter-touch” Independent Examination (IE) is therefore a less onerous alternative for smaller charities, which results in significant savings for them, in two ways:

• Staff time – less time will be spent between the reviewer and staff in order to complete the accounts scrutiny. Staff can in turn use this time on running the charity.
• Fees – typically, an independent examination could cost up to 40% less than audit in actual fees payable by the charity.

As one client put it on hearing the news of an increased threshold:

“this will cut down on costs and the stress that comes with audit scrutiny”

Does an Independent Examination really provide sufficient independent scrutiny?

The Charity Commission has stated in its publication CC31 that “an independent examination is a simpler form of scrutiny than an audit but it still provides trustees, funders, beneficiaries, stakeholders and the public with an assurance that the accounts of the charity have been reviewed by an independent person.”

Whether this level of scrutiny provides sufficient assurance for the particular stakeholder is a matter to be discerned internally by each qualifying charity. However I have found that most stakeholders would appreciate the cost savings and opt for an Independent Examination. And where further assurance is required by a given donor, a grant audit can be arranged for their grant (the cost of which is often build into the grant itself in full).

Other considerations for independent examinations: Which charities are eligible for Independent Examination?

In England and Wales (there are different thresholds for Scotland and Northern Ireland), a charity would be eligible if it passes two sets of tests.

The first set of tests relates to the charity qualifying as a “smaller charity”. This means that:-

For accounting periods ending on or after 31 March 2015, the charity has total annual income not exceeding £1,000,000 (this also applies to aggregate income where it is a group); and (b) the charity has gross assets not exceeding £3,260,000.

A charity would still be considered a small charity if it had gross assets exceeding the asset threshold but where its income is below £250,000. (NB: if gross income is above £250,000 and gross assets exceed £3,260,000, then an audit would be required).

The second set of tests relates to other possible other requirement for a statutory audit. These may be internal, but others may be external. Such requirements include:-

• The governing documents/constitutions of the charity may specify that an ‘audit’ is required (NB: constitutions can be amended if this is considered unnecessary)
• A donor or funder may requires an ‘audit’ (NB: this can be discussed with the donor to lift the requirement and/or to have a grant audit instead)

The issue of how to make the ‘right’ investment decisions is something that many trustees regularly have to deal with. In a recent article in the Third Sector magazine, I debated this issue with a sector colleague, Fred Worth, co-opted Trustee of Mencap, and have included some of the ideas discussed below.

For me, a charity’s investment decisions should be guided by two fundamental principles: first that the trustees have a legal responsibility to safeguard the assets of the charity, including cash and investments. By extension, they are required to ensure that they achieve the maximum return for the lowest risk possible. In practice, this can be a difficult balance to strike. On the one hand, charities’ resources are squeezed and any additional income (especially unrestricted) can go a long way. But the level of financial risk that comes with a high return may simply be unacceptable.

Second, any investment decisions made should promote the charity’s objectives, and not have a negative impact on the charity’s objectives. The reputational damage arising from investment decisions that don’t fit in with the charitable aims of the organisation are immeasurable. The recent media frenzy about Comic Relief’s investments (following the BBC’s Panorama programme, All In a Good Cause), is testimony how damaging some investment choices that the trustees make be on the charity and on the sector.

In practice, there’re some steps that trustees can take to help them manage the charity’s investments responsibly.

Here’re my top 10:

1. Trustees should work with senior staff to define what they consider to be acceptable forms of investments for their charity. With so much choice in the market, this may be difficult and a lot of research will need to be done;
2. List down all the industries or products that they must not invest in as a matter of principle;
3. Consider the level of risk that they are prepared to take. All investments carry a risk that the initial investment could be lost, which would have a direct negative impact on the beneficiaries. On the other hand, a higher risk investment may have the highest return which would boost the charity’s ability to reach more beneficiaries;
4. For most charities, it would be too expensive to hire an investment specialist and manage the investments in-house. Trustees should consider focussing on managed portfolios, have an analysis the funds in each portfolio, including where the funds are invested;
5. Consult with other professionals in their sector – this may be a paid consultant, but in most cases, other professionals from similar charities would be happy to share their experiences for free;
6. Have a list of the pros and cos for each fund portfolio, taking account of factors like management fees, rate of return, payment schedules, accessibility i.e. can they withdraw it at will, etc.;
7. Try and diversify the investments in order to spread the risk (although this may be unrealistic for most smaller charities);
8. Obtain and review investment performance reports as part of the management accounts review;
9. Be transparent about the decisions made e.g. by including additional information in public records such as statutory accounts about the investment decisions; and
10. Put the charity’s approach to investments in an Investment Policy.