Accounting Regs.

Basic Notes

Audits and Independent Examinations
Most organisations require some form of external scrutiny of their accounts from time to time. These notes set out the basic options and the different rules for various types of group.

Who can Audit?
The 1989 Companies Act introduced the concept of 'Registered Auditors'. These are people, registered by their professional accounting body to carry out Audits. Registration implies that the Auditor complies with all relevant legislation and standards set or adopted by his/her Professional Association. So, be careful when using the term 'Audit'. If you require or opt for an Audit you must ensure that the person or firm is a 'Registered Auditor'. The Auditor will carry out various tests and investigations to form an 'opinion' on the accounts and report their opinion to the Trustees or Directors.

Who can perform an Independent Examination?
The Charities Act 1993 states that the Independent Examiner shall be:

"an independent person who is reasonably believed by the trustees to have the requisite ability and practical experience to carry out an independent examination of the accounts".

Although, in theory, anyone can do this job, the Organisation's trustees have a legal duty to make sure that the person knows what they are doing. You could ask for references; you could ask what experience they have; you could ask if they follow the guidelines produced by the Charity Commission for conducting and Independent Examination. The Commission recommends that if your income is over £100,000 you should use a qualified accountant.

Note also that the Examiner should be a person not a company.

What does an Independent Examination Involve?
The Examiner reports to the Trustees or Directors on whether anything has come to his/her attention which gives reasonable cause to believe that the accounts do not comply with the regulations. The Examiner would normally follow the Charity Commission's guidelines for Independent Examiners. For small charities, most Examiners probably prepare Accounts from the accounting records as well as performing the Examination.

This may seem a bit odd, but it is common practice.

To what extent can you rely on an Examination?
We once heard that a Funding Officer had said ' oh everything must be OK because C A do their accounts'. This shows a serious misunderstanding of the role of the Independent Examiner. For example: the Examiner does not say that the accounts are correct; the Examiner cannot report on what is not there; the Examiner does not pass judgement on whether all Expenditure was reasonable; the Examiner does not report on the effectiveness of the use of grant aid; the Examiner will not guarantee to spot all errors, and may not even look for errors considered to be immaterial; and finally, the Examiner's Report will be written some time after the events have occurred.

Whistle-blowing and Reporting.
Any Auditor or Examiner has a duty of confidentiality to the client. However, in exceptional circumstances, there is a legal duty to report directly to the Charity Commissioners or Companies House. This would arise for example, where the Examiner came across evidence of fraud.

All Auditors and most Independent Examiners will also write a report - sometimes called a management letter - to the Trustees on conclusion of the work. This letter will point out any weaknesses in the systems that need addressing as well as any other points the trustees should consider. It is a very important document and should be read by all the Committee members.

What are the rules
Unfortunately, there are different rules depending on the legal form of your organisation.

The basic rules are as follows:

1. Your Constitution.
You must make sure you do what your constitution says. The only exception to this is for charities with older constitutions where the term 'audit' is used. Many constitutions use the term Audit without the authors really knowing what it means. If you think that the intention was not for an audit by a registered auditor then - providing you fit the criteria below - you can opt for an Independent Examination, but you must change your constitution as soon as possible.

2. Your Funders.
Watch out for any particular conditions of grant aid. It is rare for Funders to insist on a full audit, but not unheard of. Sometimes Funders are unaware of the significance of the term and you may need to educate them about the Charities Act. Sometimes, they insist on a higher level of scrutiny that is legally required.

3. Charity Law - for Charities
£ Income Requirement
0 - 25,000 No external scrutiny required
25,001 - 499,999 Audit or Independent Examination
500,000 and over* Audit
*this is for income or expenditure in the current year or either of the two previous years

4. Company Law - for groups which are NOT charities
£ Income p.a. Requirement
0 - 1,000,000 No external scrutiny required
(Small Companies)
1,000,000 and over Audit

5 . Charity and Company Law - for groups which are Charitable Companies.
£ Income p.a. Requirement
£0 - 89,999 No external scrutiny required
£90,000 - £250,000 Audit or Accountant's Report*
£250,000 and over Audit
* this is a lower form of external scrutiny and should be discussed with your Accountants

6. Groups which are not charities or companies
The only rules are those imposed by your own governing instrument or your funders.