Audits of charity accounts are currently creating a headache for the third sector. There are several causes. But some charities can escape some of the headache with thought or careful planning.
The issues with audits are UK-wide and not just confined to Scotland. There is a shortage of audit staff which is creating a bit of a crunch point. But there are other factors. Audits are complicated processes. An auditor has a great deal of work to do to meet the growing body of audit standards which apply. This means that it is naturally less cost-effective for firms to carry out audits for smaller charities.
This is having two main effects: some firms are closed to taking on new audit work; others are asking charity clients to find alternative audit providers. It’s a position that neither auditors nor charities are happy with. For charities that stick with their auditors, there may be increasing costs – and at a time of wider inflationary pressures that becomes difficult to manage.
How to solve this problem can be tricky, but there are cures that charities ought to explore. The first thing to bear in mind is that not every charity needs an audit. There are thresholds below which charities can opt for independent examination instead (charities with less than £500,000 of income, or with gross assets of less than £3.26 million). But this is only part of the story. Regardless of the audit thresholds, some charities require an audit because their constitution says so. Some need an audit because a funder or other stakeholder requires it. For others, opting for an audit is a deliberate choice to give trustees added reassurance about financial management and reporting.
If your charity does not meet the thresholds, but you are still having accounts audited, it is worth considering why. If the requirement is imposed from outside the charity, then that may be inescapable (although a discussion with relevant funders or stakeholders which require an audit may be worthwhile). If an audit is obtained because the trustees have simply chosen an audit, then it is worth revisiting the reasons for that decision.
For charities that have an audit requirement built into their constitution, charity trustees should explore whether the constitution can be changed to permit an independent examination instead. Where there is no power to change the constitution, a reorganisation scheme through OSCR may provide an answer. Considering how, and how easy it is, to change the charity’s constitution needs to be part of the process too. (And some charities may find that moving their accounting year end will allow them to stick with their auditors if all the other solutions don’t work.)
We are all mindful of the benefits that external scrutiny of charity accounts can bring. Few of us begrudge the work and cost involved if it helps to promote transparency and confidence in our charities. But the independent examination rules were created for a reason, and charities should use that option where they can. If that is the right remedy for your charity, then it’s best to embrace it. It might just let you escape the audit headache.
If you’re an SCVO member and would like to access up to two hours of free legal advice to help explore some of these options, contact us via your My SCVO account or email firstname.lastname@example.org.