You are from a small charity. It’s that time of year again – you’ve been in a trustee meeting and someone has mentioned the year-end accounts and those dreaded words: “independent examination”. A quick Google reveals lots on audits but very little on independent examinations other than guidance on how to do them from the Charity Commission. Your heart starts to race and visions fill your mind of hunting around for a petty cash receipt for the pint of milk you bought.
For many, the thought of the independent examiner coming in is akin to the fear of the auditor. Or it has no impact because your examiner is a bit like the Yeti – you’ve heard rumours of them existing and they’ve signed a report for the last five years, but no one has ever spoken to them yet alone knows what they look like. Both of these are totally the wrong reaction to the process.
So what is an independent examination?
An independent examination is an external check or scrutiny of your annual accounts and your annual report attached to it. It’s less detailed than an audit.
The examiner provides what is called negative assurance – they basically say that nothing has come to their attention that they need to flag to the trustees, whereas an auditor confirms that the accounts give a true and fair view. There should be some crossover with the techniques an auditor will use, but an examiner’s work will be less detailed and therefore less costly. This is one of the many reasons that the Charity Commission allows smaller charities to have an examination as opposed to an audit. The examiner then has to follow 13 directions laid out by the Commission, which include a multitude of things including checking the format of the accounts, but also carrying out an analytical review – basically seeing what’s changed and why. They also have to confirm that the accounts align with the accounting records beneath them, including underlying documentation, so you should expect your examiner to ask to see the underlying records. If not then they are failing to keep to one of the directions laid out by the Commission.
How do I prepare for it?
There are five main steps to preparing for an independent examination:
- Make sure you are eligible for an independent examination. It’s not quite as straightforward as whether or not your income is under £1m. A full list of the requirements is available in the Commission guidance, but another thing to consider is the value of your assets, because if these are above £3.26m you will require an audit regardless. Also, if you are registered in Scotland then they have a lower income threshold of £500,000, and your charity’s constitution may also require you to have an audit regardless of your income level.
- Make sure your independent examiner is suitable. For smaller charities there is a tendency to get a friend of the board or someone they know to do the examination pro bono, which is great, but can also be a double-edged sword. The Commission says you should check two things – firstly that they are independent, as their role suggests, and secondly, that the examiner has “the requisite ability and practical experience to carry out a competent examination”. If your income is over £250,000 the examiner should be a member of one the accounting bodies listed in the Charities Act 2011, but even below this they must meet the requirements above. They are signing off your accounts to say they are happy with the form and content – do they have the right knowledge and skill sets to do this? Do they know and understand the Charities SORP (the rule book for preparing charity accounts) if you are preparing accruals-based accounts?
- Make sure the accounting records are ready, and reconcile as much as possible to the underlying records. This sounds obvious but numerous times we have started jobs and find the accounting records are not-up-to date or the bank balance is nowhere close to the actual balance on the statement. It’s never a good place to start – your examiner should not be expecting perfection but you should do the best you can, and if there are issues then make sure you are open with your examiner early on so they can help you from the word go. Also, make sure that the records split out any restricted income and note what expenditure this money was spent on.
- Make sure the annual report and accounts are ready. It may be that your examiner is producing the final accounts for you, but regardless, make sure that the trustees’/ directors’ report is ready as your examiner is expecting to review this and for it to have already been signed off by the board. There is nothing worse for an examiner than reviewing the document only to be sent a different version two weeks later and have to start again. If changes do need to be made make sure that you track these, and agree them with the examiner so that there are no nasty surprises when they come to sign.
- Make sure the records are available. This has been harder in 2020 with Covid-19 but your examiner will want to review the paperwork that supports the accounts. This will include financial documents such as bank statements, invoices, receipts, grant agreements and payroll records, but may also include minutes of trustee meetings, registers of interest and risk registers. Make sure you know where to find this, and also ask your examiner beforehand to prepare a list of documents they may want to see.
Finally, remember that your examiner is there to help you and work with you. Don’t be afraid of them, and also don’t be afraid to ask questions about what they are doing and why. They should be willing to explain things to you and if they can’t then its probably time to change examiner. Always make sure you are getting value for your money, but remember you get what you pay for, so be prepared to invest in the process.
An independent examination should not just be a box-ticking exercise for either party – it should be a collaborative process with the end result being a document that both you as a charity and the examiner are happy and proud to put your name on.
For smaller charities, far more than larger charities, the annual accounts are one of the most important documents you produce each year. You do not necessarily have the resources to produce glossy impact reports or fundraising materials, and so it is the annual accounts that your grant funders and the general public will be looking at. Your examiner should recognise this and work with you to ensure it is a report that all are proud to sign.
And above all try to have a bit of fun in the process!
Andy Nash is founding director of Andy Nash Accounting & Consultancy Ltd
Charity Finance wishes to thank Andy Nash Accounting & Consultancy Ltd for its support with this article