Audit regime changes could increase largest charities’ costs, warns CFG

24 Jun 2022 News

Changes to the UK’s audit regime could increase audit costs for the largest charities in the country, Charity Finance Group (CFG) has warned. 

From next year, charities with an annual income of over £750m and with more than 750 employees will now be considered as public interest entities (PIEs) and be under the scrutiny of a new regulator, the Audit, Reporting and Governance Authority (ARGA).

ARGA will have powers to investigate and sanction directors who willingly make misleading or false statements about their organisation’s finances.

The government’s changes were initially set to apply to smaller organisations as well but will now only affect a handful of the largest charities in the country.

However, CFG called on the government to reduce the impact of the changes on the charities still due to be affected.

Watered down proposals

Last month, the Department for Business, Energy & Industrial Strategy (BEIS) unveiled plans to overhaul the audit and corporate governance framework through a new regulator, greater accountability for the largest businesses and addressing the “dominance” of the main audit firms.

In its original proposals, the department suggested that charities with incomes over £100m should be considered as PIEs while implementing a higher threshold for companies exceeding £200m or £500m.

The Charity Commission opposed the suggestions, saying they were irrelevant to the voluntary sector. Following heavy criticism, the government watered down its proposals, which will now only cover a small number of charities.

BEIS' reforms primarily aim to identify and prevent financial problems at large private companies.

It hopes these will restore trust in audit and corporate governance following recent corporate failures including the demises of construction company Carillion and department store chain British Home Stores. 

Government must ensure minimal impact on charities

Dr Clare Mills, director of policy and communications at CFG, said: “For those charities, inclusion will have an impact on audit arrangements and aspects of reporting, and could increase their costs. We urge the government to do all it can to reduce the impact on those charities that are included.

“Charities will also need to consider engagement with ARGA when this comes into operation in 2023 and we will be working with the Charity Commission and others to provide information and insight into the charity and not-for-profit sector which will be of use to ARGA.” 

Reducing additional burdens where possible

In its response to the consultation, BEIS stated that “it will not require these size-based PIEs to meet all of the same audit requirements as existing PIEs”. 

It said: “The government believes this approach will ensure that the companies of greatest public interest are properly scrutinised by the regulator, whilst minimising additional burdens from regulation as far as possible.”

Civil Society News understands that the government will ensure that concerned charities are given enough time to adapt to the new measures.

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