It’s important that a charity remains transparent because, despite their similarities to traditional businesses, charities answer to the generosity of their benefactors rather than to the needs and wishes of their shareholders.
In the interest of transparency, a charity’s trustees should always carry out regular audits of the charity’s accounts to ensure that financial statements are not only accurate but that the charity isn’t facing insolvency.
Depending on a charity’s gross income for the year, an independent, external audit isn’t only recommended; it’s a legal requirement. In this article, we examine when charities need to be audited, and why an audit is so important.
What Is a Charity Audit?
A charity audit is, broadly speaking, an analysis of a charity’s accounts and financial transactions. An audit looks at a charity’s financial records and statements, ensuring they are as accurate as the charity claims them to be and that they are as fully and wholly completed as possible.
A charity auditor looks at the accuracy of financial records and carries out an analysis of the charity’s financial resources and commitments. Audits examine where money is received from and where it’s being spent. Auditors ensure that charities are following the law, that money is being declared where it should be, and that everything is accounted for.
For charitable benefactors – those who fund the charity’s operations through donations – audits help to provide peace of mind. An audit helps benefactors to understand where their money is going, what it’s being spent on, and importantly if the charity is being financially mismanaged or is facing financial insolvency.
A charity audit should always be carried out by an independent and impartial auditor, such as Irwin Insolvency. Not only does this offer further transparency to the charity’s operations, it’s often a legal requirement.
When Do Charities Need Auditing?
Charities are obliged to follow the ‘Charity reporting and accounting’ guidelines, which are set by the government. These guidelines explain the financial obligations charities have, which includes standard procedures such as filing accounts and preparing financial reports. Within the guidelines, there are also a number of rules that state when charities are legally required to undertake an external audit of their finances.
Charities that meet the following criteria are legally bound to carry out an audit (although as we’ll explain shortly, there are actually two types of ‘audit’ that can be carried out).
- Charities with a gross income of £25,000 or more must have an independent examination.
- Charities with a gross income of £1,000,000 or more must have an external audit.
- Charities with assets above £3,260,000 and gross income of £250,000 or more must have an external audit.
Not all charities have a legal obligation to appoint an impartial auditor to undertake a thorough assessment of their accounts. Small charities that make less than £25,000 a year have no obligation for any form of external auditing, while those making less than £1,000,000 need what’s termed an independent examination, rather than a full-on audit.
However even if you’re not legally required to have an external audit, this doesn’t mean that the charity shouldn’t still have one – at Irwin Insolvency, we recommend one should be carried out regardless. In fact, many trustees are bound to some form of auditing by their charity’s own internal regulations and directions.
What’s the Difference Between an Audit and an Independent Examination?
As noted above, there’s a difference between an audit and an independent examination. Audits only technically apply to charities making over £1,000,000, and for all practical purposes, the differences between an audit and an independent examination are found in the details.
Charities making over £25,000 are only required to have an independent examination, which is very much like an audit. An independent examination is carried out by an impartial and external auditor who goes through the charity’s accounts and financial records to ensure everything is accurate.
An audit does exactly the same thing. The difference is that an external audit is required to go into much more detail than an independent examination. A full audit not only checks for accuracy but also offers analysis and financial solutions that the charity can put into action. In effect, an audit is a more detailed (and more effective) version of an independent examination.
An external audit and independent examination both offer an impartiallook at a charity’s finances. An effective audit, however, can help trustees to identify financial weak points, areas for further improvement, or areas of operation that need to be streamlined. Ultimately, an audit can help a charity to stay in a positive cash flow and to avoid any threat of insolvency.
Always Appoint a Professional, Independent Auditor
A charity’s directors and board of trustees are responsible for ensuring they meet the requirements set out by law, while remaining transparent in the eyes of their benefactors. For this reason, it’s incredibly important that a charity appoints a professional, independent auditor when it’s time to have the accounts assessed and scrutinised.
Impartiality is key. This not only provides benefactors with reassurance that the charity is operating above board and within its legal requirements, but an expert and impartial auditor can look at a charity’s operations from an external standpoint, potentially identifying areas for improvement that the charity might either ignore or not see.
Independent, professional auditors bring a wealth of experience to the charity and can offer expert advice based on their work with other charities, as well as their work with businesses in other sectors of the economy.
Contact Irwin Insolvency for Your Free Consultation
With decades of experience offering UK charities financial services, business advice and independent auditing, our team of licensed insolvency practitioners can offer impartial expertise that can help you through tough times.