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Government proposes stricter audit rules for largest charities

19 Mar 2021 News

Some of the country's largest charities would face much stricter rules on financial reporting, under proposals published by the government yesterday.

The proposed reforms, contained in the white paper Restoring Trust in Audit and Corporate Governance, said that ministers are “open” to the idea of applying rules to big charities which previously only applied to private firms. 

This would mean senior staff at charities with incomes over £100m could become personally liable for any errors in the accuracy of financial reporting, and potentially face bans or fines. Responsibility for charity audits currently sits with trustees.

The Charity Commission has already expressed strong opposition to the suggestion.

‘Powers to investigate and sanction’

The white paper said that “large third sector entities” may be classed as “public interest entities” (PIEs) under the new rules, adding: “Until 2016, the Financial Reporting Council inspected the audits of charities with incoming resources exceeding £100m. A similar threshold might usefully be applied to third sector entities for present purposes.”

It proposed creating a new regulator, the Audit, Reporting and Governance Authority (ARGA), with stronger powers to act if chief executives or chief financial officers are suspected of making misleading statements about company finances.

The paper said: “The government therefore intends to legislate to provide ARGA with the necessary powers to investigate and sanction breaches of corporate reporting and audit-related responsibilities by PIE directors.”

In a statement published with the paper, the government said it aimed “to make directors of the country’s biggest companies more accountable if they have been negligent in their duties”.

The government is consulting on the plans for the next 16 weeks.

Based on last year’s Charity Finance 100 Index, published by Charity Finance magazine, any new rules would affect around 60 of the country’s largest charities.

Charity Commission opposed

The Charity Commission said that its existing regulations could be extended, instead of introducing a new body.

A spokesperson for the regulator told The Telegraph last month: “We consider that there are ways to strengthen the transparency of larger charities using existing reporting processes that do not create additional regulatory and reporting burdens, as would be the case were the PIE regime extended to some charities.

“Were the PIE regime extended to charities, engagement with the charity sector would be needed to modify the regime to make it better reflect the nature of charity governance and the obligations of trustees."

CFG: 'Far-reaching implications'

Roberta Fusco, director of policy and communications at the Charity Finance Group, said: “The publication of the white paper represents a potentially significant moment in the future of the audit regime in the UK.

"These proposals could have far-reaching implications which need to be thoroughly understood by government. The potential changes to what constitutes a Public Interest Entity, for example, has to be understood in the context of large charities’ duty to deliver public benefit.

"Charity Finance Group will be working with our members and the Charity Commission to ensure that any future legislation is fair and proportional, and doesn’t unwittingly bind the sector in more complicated, burdensome red tape.”

NPC: Regulations have to go beyond finances

The charity think tank NPC told Civil Society News that there was “nothing to be feared” from stricter regulations, but warned against focusing only on charities’ finances.

Dan Corry, the chief executive of NPC, said: “Stronger regulation around reporting rules for large charities is nothing to be feared and could be good for them, as long as it takes account of the particular issues around the way charities differ from the private sector.

“But charities and the public need reporting and auditing that tell us about their impact as well. It’s not enough just to be financially well run. You’ve got to be making a difference too. 

“These reforms could be an opportunity to embed improving impact into the approach of all charity directors and boards.”

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