Guidance for auditors and independent examiners

(Version April 2008)

Content

Introduction

The Commission and OSCR value the objectivity and independence that auditors bring to their work and the assurance that the audit process provides makes an important contribution to maintaining public trust and confidence in charities. Auditors in both England and Wales and Scotland have a common statutory duty to report matters of material significance to charity regulators. This important duty will be a key contribution to the ability of charity regulators to take timely action and so we have agreed a common list of matters of material significance to assist the auditor in reporting important matters on a timely basis. The sooner the charity regulators are made aware of a matter the sooner it can be considered and where appropriate regulatory action taken to protect a charity, its beneficiaries and its charitable assets.

This guidance mirrors that contained in Appendix 6 of the consultation draft of Practice Note 11, The Audit of Charities in the United Kingdom, published by the Auditing Practices Board in April 2008. Auditors should refer to this publication for more detail regarding both the audit of charities and the “whistleblowing” duty.

Guidance

The Charities Act 1993 section 44, as amended by the Charities Act 2006, places a duty on the auditors of both a non-company charity and a company charity to report matters of “material significance” to the Commission. Section 46 of the Charities and Trustee Investment (Scotland) Act 2005 places a similar duty on auditors of Scottish charities to report matters of “material significance” to OSCR.

Independent Examiners are subject to similar duties and should refer to Independent Examination of Charity Accounts (CC31) for guidance on their responsibilities in this area.

The duty to report arises where the auditor, in the course of their audit, identifies a matter, which relates to the activities or affairs of the charity or of any connected institution or body, and which the auditor has reasonable cause to believe is likely to be of material significance for the purposes of the exercise by the Commission of its functions under section 8 or 18 of the Charities Act 1993 or the exercise by OSCR of its functions under sections 28, 30 or 31 of the Charities and Trustee Investment (Scotland) Act 2005.

Subject to compliance with money laundering legislation regarding “tipping off”, in the circumstances leading to a right or duty to report, the auditor is entitled to communicate to charity regulators in good faith information or opinions relating to the business or affairs of the entity or any associated body without contravening the duty of confidence owed to the entity. In addition, in England and Wales, the Charities Act 1993 provides additional statutory protection for the auditor as no duty, for example confidentiality, is regarded as contravened merely because of any information or opinion contained in the report.

The reporting of a matter of material significance is a separate report from the auditor’s report on the accounts. The Charities Act 1993 and the Charities and Trustee Investment (Scotland) Act 2005 require the report to be made immediately the matter comes to the auditor’s attention and in England and Wales the Charities Act 1993 requires that this is done in writing. There is no requirement under Scottish law for a report to be made in writing but it is recommended to do so.

It is not part of the reporting duty to require auditors to perform any additional scrutiny work as a result of the statutory duty nor are they required specifically to seek out reportable matters. Auditors do however include procedures within their planning processes to ensure that members of the audit team have sufficient understanding (in the context of their role) to enable them to identify situations which may give reasonable cause to believe that a matter should be reported to the regulator.

In order to recognise whether a situation is likely to be of material significance to a regulator's function an understanding is needed of those matters which either due to their nature or potential financial impact are likely to require evaluation and, where appropriate, investigation by the regulator.
Both the Charity Commission and OSCR will always consider the following to be of material significance and hence reportable:

  • matters suggesting dishonesty or fraud involving a significant loss of, or a major risk to, charitable funds or assets;
  • failure(s) of internal controls, including failure(s) in charity governance, that resulted in a significant loss or misappropriation of charitable funds, or which leads to significant charitable funds being put at major risk;
  • matters leading to the knowledge or suspicion that the charity or charitable funds have been used for money laundering or such funds are the proceeds of serious organised crime or that the charity is a conduit for criminal activity;
  • matters leading to the belief or suspicion that the charity, its trustees, employees or assets, have been involved in or used to support terrorism or proscribed organisations in the UK or outside of the UK;
  • evidence suggesting that in the way the charity carries out its work relating to the care and welfare of beneficiaries, the charity’s beneficiaries have been or were put at significant risk of abuse or mistreatment;
  • significant or recurring breach(es) of either a legislative requirement or of the charity’s trusts;
  • a deliberate or significant breach of an order or direction made by a charity regulator under statutory powers including suspending a charity trustee, prohibiting a particular transaction or activity or granting consent on particular terms involving significant charitable assets or liabilities; and
  • the notification on ceasing to hold office or resigning from office, of those matters reported to the charity’s trustees.

These matters are considered central to the integrity of a charity and as such will require evaluation and where appropriate investigation by the regulators. The Charity Commission and OSCR consider all such reports to have a very high intelligence value. Both take a risk based and proportionate approach to inquiry work when deciding whether to open an inquiry.

Matters considered material may change from time to time and guidance on what is currently considered a serious incident for reporting by trustees will be found on the Charity Commission website under Serious Incident Reporting or contained in the Commission’s additional monitoring questions as part of its annual return process. In Scotland, such matters are reflected in OSCR’s current monitoring programme priorities.

The list of “serious incidents” is principally concerned with serious criminal or unlawful activity, or very serious incidents concerning a charity that may affect its funds, property, beneficiaries or reputation. Some of the incidents listed may not actually be criminal activity, but do flag up a risk of potential criminal activity or other risks, which if realised, would have a serious detrimental impact on the charity.

There is no serious incident reporting requirement placed on trustees in Scotland.

Where auditors make a report, they may not have all the information but should be prepared to provide as much relevant information as possible about the matter(s) they are reporting.

The auditor’s right to report to charity regulators under the Charities Act 1993 Act and the Charities and Trustee Investment (Scotland) Act 2005

The auditor also has a broad discretionary right to report matters that they believe may be relevant to the work of the charity regulators but they are not under a duty to report such matters.

The Charity Commission and OSCR consider such reports to have considerable intelligence value and welcome these submissions. Given the broad discretion permitted it is not appropriate to list instances for reporting but the auditor may usefully review matters which were not considered material relating to the statutory duty and matters upon which trustees are requested to provide additional information as part of the annual return process.

Matters falling within this discretionary category are likely to be indicative of significant risks to charitable funds or their proper application and would therefore normally be relevant to the work of the regulators. Where such a matter arises, the auditor may discuss the matter with the trustees to identify whether it remains a matter of concern and whether the trustees have taken or are taking action which can reasonably be expected to remedy or mitigate the effect on the current or future years.

Although the auditor enjoys a discretion as to whether to make a report of a matter relevant to the work of the Charity Commission and OSCR, it is recommended that auditors document any relevant matters identified in the course of the audit and document the basis of any decision not to report a matter falling within this discretionary category.

Ceasing to hold office

In addition to the duty to report matters of material significance, Regulations under the Charities Act 1993 and the Charities and Trustee Investment (Scotland) Act 2005 provide that 'Where an auditor appointed by charity trustees ceases for any reason to hold office he shall send to the charity trustees a statement of any circumstances connected with his ceasing to hold office which he considers should be brought to their attention or, if he considers that there are no such circumstances, a statement that there are none; and the auditor shall send a copy of any statement sent to the charity trustees under this paragraph (except a statement that there are no such circumstances) to…” the Charity Commission and/ or OSCR.

Matters that may require consideration in relation to this duty include:

  • disagreement over opinions expressed or to be expressed in an auditors' report; disagreement over any disclosure made or to be made to the Commission in respect of a matter of material significance;
  • disagreement over any accounting policy, assumption, financial judgment or disclosure made in the accounts or in the preparation of the accounts;
  • concerns over any matter which is believed to give rise to a material risk of a loss of charitable funds; and
  • lack of co-operation or obstruction in the context of an audit.

Cross Border Charities

Where a charity registered in England & Wales also operates in Scotland it will need to be registered with OSCR as well as the Charity Commission. For such cross border charities neither regulator is considered to be the principal regulator and both will have an interest in receiving reports. The auditor should therefore make a report to both regulators who will determine which regulator takes forward the issues raised by the report forward.

Reporting gateways

To ensure reports are handled efficiently and immediately, auditors should make reports to the regulators as follows:

  • To the Charity Commission by email
  • To OSCR by email

The email should be headed “Auditors reporting a matter of material significance” and within the body of the e-mail, or in an attachment thereto, the following information should be provided:

  • Your name
  • Your business address
  • The name of your audit or accounting services firm, if applicable
  • Your contact e-mail address and contact telephone number
  • Charity name
  • Charity Registration number
  • The heading(s) under which you are reporting
  • Details of the matter(s) reported
  • The information you have available on the matter(s) reported
  • The amount(s) involved, if known
  • Any action(s) known to you which the trustees have taken or are taking regarding the matter
  • And if the report concerns terrorist or criminal activity confirmation that you have already notified the Serious Organised Crime Agency and/or the Police as appropriate.
  • And if the report concerns the abuse of vulnerable beneficiaries details of whether you have contacted the Police and/or Social Services.

In England and Wales the Charities Act 1993 requires the report to be in writing and therefore a hard copy of any report made electronically, marked copy, should also be forwarded to:

Charity Commission Direct
PO Box 1227
Liverpool
L69 3UG

In Scotland, there is no legislative requirement to make the report in writing, but it is recommended that a written report or record of any verbal report is forwarded to:

OSCR
Quadrant House
9 Riverside Drive
Dundee
DD1 4NY

Reporting accountants

Prior to 1 April 2008, reporting accountants reporting on an audit exempt charitable company had no duty at all to report to the regulator. Although the changes to company law and the extension of the independent examination and audit regime of the Charities Act to small charitable companies (as defined by section 382 Companies Act 2006) means that the reporting accountant regime came to an end for financial years beginning 1 April 2008, the statutory duty also applies to reporting accountants.

Reporting accountants must comply with their statutory duty to report on any compilation of the accounts for a charitable company, irrespective of its financial year, from 1 April and should refer to the matters of material significance listed above.

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