Are auditors becoming the Charity Commission’s canary in the coal mine?

Published on 24 November 2017

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Following a Budget that failed to commit any more significant funding to the Charity Commission coffers, it is no surprise to see more guidance being released for auditors and independent examiners concerning the reporting of relevant matters of interest to the regulator (https://www.gov.uk/government/publications/reporting-relevant-matters-of-interest-to-uk-charity-regulators). Clearly with limited resources, the Commission requires support in identifying issues within the charity sector and beyond the existing whistleblowing procedures. Placing more responsibility on auditors seems an obvious option.

What is expected of an auditor and the work they perform? It is fair to say there is often a misconception of what an audit involves. I’ve regularly heard comments along the lines of “they’ve been audited, so they must be fine”. That will be the case in most instances, but ask those involved in Kids Company. They were subject to audit and things didn’t work out so well there. Did the auditors of Kids Company do enough and challenge the Trustees? If you were to read the Public Administration and Constitutional Affairs Committee report, their interview of the auditors would suggest they did not. But, if they had done more, would it have made a difference; could they have saved the charity? That question will forever go unanswered, but undoubtedly the Charity Commission doesn’t want a similar situation to arise again.

This new guidance highlights that there is no requirement for auditors or independent examiners to undertake any additional audit or examination work to identify matters for reporting. Clearly, however, auditors will have to ensure that the work they perform is sufficient to identify matters that are categorised as “must report”. The examples given in the guidance are all significant matters that you would reasonably expect an auditor to report if, of course, they have been identified. However, the “may report” matters are far more open to the auditors’ judgment and interpretation. They are described as “matters of interest” to the regulator, so the auditor must exercise their judgment to determine their seriousness. The guidance gives four examples, the final one of which is particularly interesting. It talks of a larger charity that relies on the Chief Executive Officer and the Finance Director to manage the charity’s finances with some input from the Honorary Treasurer, but little input from the other Trustees other than an annual catch-up. I wonder how many charities have Trustee boards that can relate to this scenario.

The guidance states “when in doubt, report it”. Whilst auditors will be reluctant to report matters which could put a strain on the relationship they have with their clients, as was the case with Kids Company, staying silent can not now be the answer. The charity sector continues to have mud slung at it regularly by the media, so this should be seen as a positive move by the Charity Commission. It will help enable the regulator to hold charities to account and will act as a deterrent to those charities that tarnish the sector as a whole.

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