Key changes
The key changes are divided into the following sections:
- the draft Directions
- the guidance on the draft Directions; and
- the appendices offering additional guidance
The following extract is from the draft directions:
The draft Directions
Not all of the proposed Directions have changed from the existing Directions. Where possible, to keep regulatory burdens to a minimum and keep any changes to the absolute minimum necessary, the existing Directions have been retained.
The following Directions have been revised to take account of the extension of independent examination to company charities and to reflect the new statutory reporting duty, following the Charities Act 2006.
Direction 1 (Examination and Accounting Thresholds) is changed to require the examiner to ensure that a company charity qualifies both as a small company and for independent examination threshold purposes.
Direction 5 (Accounting Records) is changed to require the examiner of a company charity to ensure accounting records have been kept in accordance with company law.
Direction 7 (Form and Contents of Accounts) is changed to require the examiner to check whether the format of the accounts prepared by a company charity or a non-company charity are consistent with the SORP.
Direction 8 (Accounting Policies, Estimates and Judgements) is changed to require the examiner to check as to whether the accounting policies for accounts prepared on an accruals basis are consistent with the SORP.
Direction 9 (Events Subsequent to the Year-End) is extended to apply also to small company charities.
Direction 10 (Consistency of Annual Reports with the Accounts) is extended to apply also to small company charities.
Direction 11 (Examiner’s Report) is updated to refer to the relevant regulation in the draft Charities (Accounts and Reports) Regulations 2007 and company law.
Direction 12 is withdrawn and replaced by a statement of the reporting duty imposed by sections 29 and 33 of the 2006 Act.
Guidance on the statutory duty to report
The 2006 Act amends the Charities Act 1993 and creates a new legal duty for independent examiners. Where someone acting as an independent examiner becomes aware of a matter during the course of their examination, which relates to the activities or affairs of the charity, or of any connected institution, or body, and they have reasonable cause to believe that the matter is likely to be of material significance for the purposes of the Commission in the exercise of its inquiry functions, they must then make a written report to the Commission.
To assist the examiner in interpreting this reporting duty, the non-statutory guidance endeavours to place the duty in context and explains how to make a report and also offers advice on the discretionary power of examiners (and auditors) to make a report provided for in the Act.
The guidance on the draft Directions
Direction1 (Examination and Accounting Thresholds) has been updated for the extension of independent examination to small company charities and notes the new requirement to disclose the circumstances where an independent examination is conducted instead of an audit.
Direction 2 (Understanding the Charity) is expanded to cross refer to appendix 5 and to emphasise that normally confirmation of matters through discussion is sufficient but in certain circumstances further checks may be necessary.
Direction 3 (Documentation) now clarifies that it is likely only to be in exceptional circumstances that written confirmation of matters will be required of trustees.
Direction 4 (Comparison with Accounting Records) has been modified concerning the involvement of the examiner in accounts preparation.
Direction 5 (Accounting Records) has been updated for the extension of independent examination to small company charities and notes the accounting records required by company law.
Direction 6 (Analytical Procedures) is substantially unchanged.
Direction 7 (Form and Content of Accounts) has been updated for the extension of independent examination to small company charities and notes that where a separate income and expenditure accounts is prepared, it should be consistent with the Statement of Financial Activities.
Direction 8 (Accounting Policies, Estimates and Judgements) has been updated for the extension of independent examination to small company charities to highlight that consistency with the SORP ensures the accounts are “true and fair”.
Direction 9 (Events Subsequent to Year End) has been updated for the extension of independent examination to small company charities.
Direction 10 (Trustees’ Annual Report) has been updated for the extension of independent examination to small company charities with reference to the requirement for a directors’ report.
Direction 11 (Examiner’s Report) has been updated for the extension of independent examination to small company charities with references to Companies Acts requirements.
Direction 12 (Reports to the Charity Commissioners) has been withdrawn and replaced by guidance on the new statutory duty to report.
The appendices offering further guidance
Appendix 1 (Guidance on the Selection of an Examiner) has been updated for the new category of examiner of charities with an income exceeding £250,000.
Appendix 2 (Calculation of Gross Income) has been updated setting out our current administrative definition of gross income.
Appendix 3 (Flowchart indicating Eligibility Requirements for Independent Examination) replaces the previous Appendix 7, and has been adapted to reflect the extension of independent examination to for small company charities.
Appendix 4 (Reporting Duties under the 2005 Regulations and Examples of Examiner’s Reports) has been updated and additional example reports for company charities and charities operating in England and Wales and Scotland have been added.
Appendix 5 (Examples of matters which are of material significance to the Charity Commission, giving rise to a legal duty to make a report to the Charity Commission) replaces the previous guidance which gave examples of deliberate and reckless misconduct. The new appendix explains the statutory duty to make a report to the Commission and the discretionary power to make a report and gives examples of four areas where a statutory duty may rise and provides model reports. The appendix also details common potential problem areas for small charities to assist the examiner to plan their examination and analytical review.
Eligibility requirements independent examiners for charities with a gross income exceeding £250,000
The Charities Act 2006 requires that where a charity is eligible for an independent examination and its gross income exceeds £250,000 the examiner must be a member of one of the following recognised bodies:
- Institute of Chartered Accountants in England and Wales;
- Institute of Chartered Accountants of Scotland;
- Institute of Chartered Accountants in Ireland;
- Association of Chartered Certified Accountants;
- Association of Authorised Public Accountants;
- Association of Accounting Technicians;
- Association of International Accountants;
- Chartered Institute of Management Accountants;
- Institute of Chartered Secretaries and Administrators;
- Chartered Institute of Public Finance and Accountancy; or
- Fellow of the Association of Charity Independent Examiners.
Tony Scott
November 2007