The trustees of all registered charities must produce a trustees’ annual report and accounts each year. Where a charity’s annual income is over £25,000, the trustees must also arrange for an independent person or accountancy firm to carry out either an audit or an independent examination of their charity’s accounts.
The purpose of the Independent Examination is to give the charity’s trustees, supporters, beneficiaries and the wider public, some independent assurance that the charity’s money has been properly accounted for and accounting records kept. The trustees of most charities can choose to have an independent examination instead of an audit. Independent examination is a ‘light touch’ scrutiny involving the examiner checking for specific matters only. Because it is narrowly defined and does not involve forming an opinion as to whether the accounts are ‘true and fair’, it usually costs less than an audit.
This guidance is for the trustees of charities registered in England and Wales. If your charity is also registered in Scotland then different or additional requirements may apply.
Can we choose to have an Independent Examination?
The trustees will usually be able to choose an independent examination instead of an audit if your charity’s gross income is:
- more than £25,000, but not more than £1 million, provided that
- if its gross income is more than £250,000, its gross assets (fixed assets plus current assets) are £3.26 million or less
The trustees will not be able to choose an independent examination if the charity’s governing document, a funder or the Commission requires an audit to be carried out. If your charity’s governing document requires an audit, the trustees may wish to amend the governing document to remove this provision so that they can choose an independent examination.
The trustees of charities with gross incomes of £25,000 or less do not usually have to arrange for any scrutiny of their charity’s accounts. However, you should check whether your charity is subject to additional external scrutiny requirements.
The trustees of charities with gross incomes of more than £1 million (or more than £250,000 and with gross assets of more than £3.26 million) must arrange for their charity’s accounts to be audited. They may not choose an independent examination. The only exception is where the Commission has approved an independent examination of a particular year’s accounts instead of an audit. The Commission must be satisfied that there are exceptional circumstances and that the nature of the funds otherwise subject to audit are such that there is a reduced risk to the charity to justify a lower standard of external scrutiny. If the Commission grants the approval, the trustees must provide the examiner with a copy of it. The Commission cannot approve an independent examination in place of an audit if your charity is subject to audit under the Companies Act 2006.
How to we Appoint a Suitable Person to Carry Out the Independent Examination?
The trustees have a legal duty under the Charities Act 2011 to appoint ‘an independent person who is reasonably believed by the trustees to have the requisite ability and practical experience to carry out a competent examination of the accounts’.
Who Qualifies as an "Independent Person"?
The examiner must be independent of the charity. Independence means that the examiner must not be influenced, or could not be perceived to be influenced, by their relationships with the charity and its trustees. Therefore, the examiner cannot be a trustee of the charity. Independence is not the same as having no connection with the charity. An examiner can be a supporter of the charity, provided that they do not have a close relationship with the charity or its trustees and they are not involved in the day to day administration of the charity.
Examples of situations that would call an examiner’s independence into question are where they:
- are an employee of the charity or its book-keeper
- serve on a sub-committee overseeing the charity’s finances
- are a major donor to, or beneficiary of, the charity
- have a significant financial or commercial relationship with the charity or its trustees
- have a close relationship with the trustees or any other related parties.
If the trustees are unsure whether their proposed examiner is independent, they should ask the examiner to explain in writing why they consider that they meet the independence criteria. The trustees should then consider whether they are satisfied with the explanations given.
The trustees must respect the examiner’s independence and must not act in a way that might undermine it. Accordingly, the trustees must not state or imply that awarding the work is conditional on the examiner agreeing to:
- provide personal payments or benefits to the trustees, or provide donations of money, benefits in kind or services to the charity (other than the conduct of the independent examination itself), or
- accept particular accounting policies or accounting treatments
The Commission views such behaviour as unethical. It may also constitute an offence under the Bribery Act 2010, or of a breach of duty or other misconduct or mismanagement in the administration of your charity. For a trustee who is a member of a professional body it may also be a breach of their professional body’s ethical standards.
What is "the requisite ability and practical experience to carry out a competent examination"
The examiner must have the skills and experience needed to carry out his or her responsibilities.
All examiners must also understand the key governance and reporting requirements that are specific to charities. These include the responsibilities of trustees and the requirements to produce a trustees’ annual report and to account for the different types of charitable funds. Whatever their skills and professional qualifications, new examiners who are not familiar with the charity sector will need to gain this background knowledge before starting their examination.
An examiner must also have sufficient accounting skills to carry out an independent examination. The extent of the skills required depends upon the charity’s gross income and the complexity of its accounts:
- income over £250,000. The trustees must appoint an examiner who is a member of one of the accountancy bodies listed in the appendix to the Charities Act 2011 (we are members of the Institute of Financial Accountants and therefore qualify).
- income £250,000 or less and your charity prepares accruals accounts. The trustees are not required to appoint an examiner who is a member of one of the accountancy bodies listed in the Charities Act 2011. However, the examiner will need an understanding of accounting principles, accounting standards and the Charities SORP and so the government recommends that the trustees select an examiner who is a member of one of the accountancy bodies listed in the appendix
- income £250,000 or less and your charity has opted to prepare receipts and payments accounts. The trustees are not required to appoint an examiner who is a member of one of the accountancy bodies listed in the appendix. The examiner will need to demonstrate sufficient financial awareness, numeracy skills and relevant experience to carry out the work and make the judgements required
The trustees may find it helpful to draw up a set of questions to ask their proposed examiner to help them check that the person has the skills and experience needed. You should ask:
- all examiners, to confirm that they have read and understood the Commission’s Directions and guidance
- professional examiners, to provide proof of membership of one of the professional bodies listed in the appendix and that they meet that body’s requirements for acting as an independent examiner. In particular, the examiner is likely to need a practising certificate or licence, although if he or she is not charging a fee to carry out the independent examination this may not be necessary. This check can be done using each body’s on-line member search tool, or directly if the body does not have this facility
- non-professional examiners, to explain their skills and experience and why this makes them competent to carry out the work. For example, the examiner may work in a role that involves financial management, such as setting and managing budgets and reviewing financial reports, or that requires knowledge of accounting systems, such as maintaining financial records and internal controls
The trustees’ decision to appoint a person to act as the charity’s examiner should be in writing and recorded in the charity’s minutes. The examiner should confirm their appointment and this can be done by an exchange of emails. Professional examiners may issue a letter of engagement, setting out the terms of their appointment including their fee.
The process of finding and appointing an examiner can take time and so should not be left until the trustees’ annual report and accounts are due for filing.
Each year, check that the independent examiner remains independent and has the ability and experience needed
Before confirming the examiner’s appointment for the following year’s accounts, the trustees should confirm that their examiner remains independent and has the skills and experience needed. Factors that the trustees should consider include whether:
- there have been significant changes in the charity’s income and/ or gross assets. For example, if the charity’s income increases to over £250,000 then the trustees must check whether the charity is still eligible to choose an independent examination and, if so, whether their examiner is a member of one of the accountancy bodies listed in the appendix
- they have concerns that the examiner has not carried out previous examinations in accordance with the Commission’s Directions and guidance. If the Commission advises the trustees that their examiner has not performed to the required standard, the trustees should cease to use that examiner and appoint someone else who is appropriately qualified. This is also true were the Commission to find that an auditor has not performed to the required standard. If the trustees do not follow the Commission’s advice, this can be evidence of breach of duty or other misconduct or mismanagement on the trustees’ part which may cause the Commission to take regulatory action to protect the charity
We offer Independent Examination
Independent Examination is carried out by Kay Wightman who is a fellow of the Institute of Financial Accountants and has over 25 years experience in the charity sector.
If you would like to find out more please drop us a message or give us a call.