productivity, performance, profit

Independent Examination of Charity Accounts

Our principal, David Nicoll, is an Assciate Member of the Association of Charity Independent Examiners.

Independent Examination (IE) is an alternative to a financial full audit for smaller charities - a legally acceptable form of external scrutiny of their end of year accounts. The definitions of smaller’ vary in different parts of the UK (see below).

Which charities are eligible for Independent Examination?

  • Registered charities
  • Excepted charities (often churches or scout or guide organisations)
  • At the moment, mainly charities which are not also registered as companies (see below)
  • Charities whose governing documents/constitutions do not specify an ‘audit’
  • (NB: constitutions can be amended if this is the only stumbling block)
  • Charities where there is not a donor or funder who requires an ‘audit’
    (NB: if they do require an ‘audit’, it may be worth negotiating with your donor/funder)
  • Charities that are ‘smaller’ …

Definitions of ‘smaller’ charities

In England and Wales

Income and expenditure have to be in the range of £10,000 to £250,000 per year for the year for which the IE is being carried out and for the two preceding financial years.

As part of the implementation of the Charities Act 2006, the upper limit will rise to £500,000; will apply to income only; and will apply to the year in question only. These rules will apply to accounting periods beginning on or after 27 February 2007, ie, to financial year-ends of 26 February 2008 onwards.

In Scotland

Independent Examination is a requirement for charities with income of up to £500,000 per year, for accounting periods which began on or after 1 April 2006 (the upper limit was £100,000 for pre-1 April 2006 accounts).

In Northern Ireland

Charity regulation is due to be introduced in Northern Ireland during 2007, at which point IE will be a requirement for charities with annual income of up to £500,000.

Asset tests

So far, ‘smaller’ has been defined by income (and expenditure). However, the assets which a charity owns also help define whether a charity require an IE or an audit - or they will do shortly. If a charity’s assets are £2.8m or more, then:

  • In England and Wales, as part of the implementation of the Charities Act 2006, an audit will be required for accounting periods beginning on or after 27 February 2007, ie, for financial year-ends 26 February 2008 onwards, if the charity’s annual income is over £100,000;
  • In Scotland, for accounting periods from 1 April 2006, an audit will be required irrespective of the charity’s income;
  • In Northern Ireland, once the relevant part of the new charity legislation has been implemented (some time during 2007-08), then an audit will be required if the charity’s annual income is over £100,000.

Charitable companies

In England and Wales, it is anticipated that IE will become a requirement for charitable companies with incomes of £10,000 to £500,000 once certain aspects of the Charities Act 2006 are implemented in the autumn of 2007, ie, for year-ends approx utumn 2008 onwards. We will be able to clarify once the detail is known.

In Scotland, all charities now have to have some form of external scrutiny of their accounts. Charitable companies with income under £90,000, which previously did not have to be scrutinised, therefore have to have an IE (or a Reporting Accountant) for accounting periods beginning on or after 1 April 2006.

We would anticipate that in both Scotland and Northern Ireland, charitable companies with incomes up to £500,000 will in due course be eligible for IE, as the Charities Act changes mentioned above for England and Wales flow from changes to company legislation (the Companies Act 2006) which we understand to have UK-wide application.

Charitable Incorporated Organisations (CIO’s) and SCIO’s in Scotland

The CIO (and SCIO) is a new legal form of charity which does not yet exist in practice. Once it does, possibly in 2008, CIO’s will sit under the IE regime if they are within the relevant income band for IE in their part of the UK.

What are the differences between Audit and Independent Examination?

As well as the difference in who can carry out an Independent Examination outlined above, the other major differences lie in the level of scrutiny and the nature of the report:

  • an independent examiner does not scrutinise a charity’s accounts to the same level as an audit (although the Charity Commission’s Directions still take the examiner through a 12-stage process);
  • in England and Wales - and in Scotland for accounting periods from 1 April 2006 onwards - an independent examiner writes a report which gives negative assurance (‘no matter has come to my attention …’) rather than positive assurance (a ‘true and fair’ view). We would expect this also to be the case in due course in Northern Ireland.


Benefits of Independent Examination?

  • it is less work for all concerned
  • therefore, it should be cheaper
  • allowing charities to spend more time/money on good causes rather than on scrutiny

(NB: an eligible charity can opt for an audit rather than an IE - but its Trustees should be able to justify that choice, particularly bearing in mind the extra expense incurred)