The Charity Commission analysed a sample of 296 charities’ accounts to see whether they complied with the basic standard of accounting requirements for charities, including around disclosure, quality of accounts and how they accounted for charitable funds. It has now drawn up a list of sub-standard practitioners which it has shared with the likes of ICAEW and ACCA, in a bid to force the professional bodies to raise standards.

The research found that one in four charities failed to report related party transactions with the lack of disclosure described as a significant concern, while the regulator criticised trustees for their failure to manage conflicts of interest which were also being widely under-reported.

The smallest charities with income below £250,000 were worst at disclosing related party transactions, with 55% of these organisations failing to meet reporting expectations. The largest charities with revenues over £1m performed better but still failed to provide full disclosure with 14% of this segment not operating with full transparency.

Overall, the quality of accounts deteriorated the smaller the charity with only half of the smallest bracket of charities including full income and expenditure accounts. In addition, two thirds (66%) of the accounts of these smaller charities failed to meet the Commission’s benchmark, while a quarter (24%) of the £1m plus charities were also reporting sub-standard accounts.

Accounts reviewed by an auditor met the benchmark more frequently than those reviewed by an independent examiner. Although qualified examiners performed better, only 44% of accounts submitted by qualified examiners met the benchmark. Just 18% of unqualified examiners met the benchmark.

The trustees of the approximately 64,000 charities on the Commission’s register with incomes over £25,000 must arrange for either an audit or an independent examination of their charity’s accounts. Charities with incomes over £1m (and those with incomes over £250,000 and gross assets over £3.26m) must have an audit. Most other charities can opt for an independent examination, unless an audit is required for another reason, such as by the charity’s governing document.

Professional institutes need to improve awareness 

The regulator is working closely with professional accounting bodies, ICAEW and ACCA, to improve their members’ awareness of charity reporting and accounting requirements as neither organisation had a clean sheet.

The majority of accounts reviewed were audited or examined by an ICAEW member – 203 charities –  with a third of those inspected failing to meet the benchmark criteria. In a statement ICAEW said: ‘While ICAEW auditors and independent examiners fared better than others, the number of accounts not meeting the external scrutiny benchmark is still disappointing. We have asked the Charity Commission for more details and we have agreed a plan with them to improve the quality of work of ICAEW members in this important area.

‘The results of the review also send a clear message to trustees in terms of the choices they make when they appoint auditors and independent examiners, particularly where unqualified advisors are under consideration.’

Of 47 charity accounts audited by ACCA members, 30 failed to meet the basic benchmark criteria. An ACCA statement said: ‘As a result of this review and its findings, we are working closely with the Commission and our members to ensure the value of audit and all reporting for the charity sector remains a top priority. It is important for anyone involved in the charity sector, especially trustees, auditors, independent examiners, internal auditors and professional bodies, to take appropriate action.’

The Commission may also use non-compliance with the benchmark to raise formal complaints with professional bodies.

Nigel Davies, head of accountancy services at the Charity Commission said: ‘We know from research we have carried out into public trust in charities that the public care deeply about transparency. It is therefore vital that charities are able to provide an accurate and clear picture of their finances.

‘External scrutiny is an essential part of the checks and balances process that charity accounts go through and so it is disappointing that so many independent examiners and auditors appear to lack the necessary understanding of the external scrutiny framework.

‘Those that are getting this right are playing an important role in upholding charities’ accountability to us as regulator, and the public. Clearly others are letting the profession and charities down. We are working closely with the accounting profession to tackle shortcomings and raise standards; I am encouraged by the commitments to work with us that have already been made."

The benchmark will also support the Commission’s regulatory casework, by identifying external scrutiny that failed the benchmark. The regulator has already contacted 135 charities that filed trustees’ annual reports, external scrutiny reports and/or accounts that failed the benchmark, and provided guidance to help them improve the quality of future trustees’ reports and accounts.

The Commission has also updated its guidance for trustees with a refresh of CC31, the Independent examination of charity accounts: guidance for trustees, to help trustees appoint an independent examiner with the right ability and practical experience to carry out a competent examination of the accounts.

Charity Commission report, Accounts monitoring review: auditors' and independent examiners' compliance with their responsibilities

Sara White