Financial Year End- Independent Examination Process
The December “Issue of the month” included a gentle reminder, where relevant, to begin thinking about preparing for the end of the financial year. Key to that is the appointment of the Independent Examiner / Auditor.
The importance of this appointment cannot be underestimated for several reasons. What follows are the key issues to consider when maximising the benefit of what is sometimes thought of as a necessary evil.
Independent examination of the financial statements is important for the following reasons;
Independent external scrutiny minimises risk of fraud. This doesn’t mean that fraud is eliminated. However, a thorough examination of the underlying financial systems supporting the accounts, should deter malpractice.
The annual examination should include a basic review of the financial systems. Whether the financial systems are manual, spreadsheet based or held on a specific software package, a thorough review of their integrity and security is essential. This demonstrates good governance.
Churches exist for public benefit. This is a fundamental of charity law. The need for financial transparency follows. The annual external scrutiny of church finances is an integral part of ensuring financial openness. The Trustees Annual Report, which includes the financial statements, are (or certainly should be) public documents.
The Independent Examiner is a source of help and advice. The Independent Examination can sometimes be viewed as confrontational and an irritation. An experienced independent examiner may be able to offer advice on more efficient and effective ways of managing a church’s finances.
Independent Examination or an Audit
The question may arise whether an independent examination is sufficient or whether a full audit is required. There is a fundamental difference between the two.
Fundamental difference between an Independent Examination and an Audit An Independent Examination (I.E.) is the legal minimum required and arguably should be followed by all churches whose gross income and total assets fall below the financial thresholds.
The scope of an I.E. is defined by the Charity Commission. Guidance notes CC31 for trustees, and CC32 for examiners should be followed. The I.E. simply seeks to confirm that the trustees have not failed in their statutory duty as far as the accounts’ preparation is concerned. Who may carry out and I.E. is summarised below.
An audit is far more comprehensive. An audit seeks to provide a “positive assurance that the accounts give a “true and fair view” of the finances. The audit is undertaken by a registered auditor in accordance with the Financial Reporting Council standards.
Financial thresholds The Charities Act requires an I.E. or an Audit depending upon gross income and total assets as follows:
Gross Income
Total Assets
(£/year)
Up to £3.26m
Over £3.26m
Up to £25k
Nothing (I.E. if a CIO)
Nothing (I.E. if a CIO)
£25k – £250k
I.E.
IE
£250k – £1m
I.E.
Audit
Over £1m
Audit
Audit
Governing document It is important to know the church’s governing document requirements. Some independent churches and larger charities below the financial thresholds may be required by their governing document to carry out an annual audit.
Charities Act definition The Charities Act 2011 (Section 145) defines an I.E. as “an independent person who is reasonably believed by the charity trustees to have the requisite ability and practical experience to carry out a competent examination of the accounts.” https://www.legislation.gov.uk/ukpga/2011/25/section/145
Key terms
Independent The I.E. must not be connected in any way with the decision-making process of the church or charity. The I.E. must not be perceived as being influenced by their relationships with the church or charity and its trustees.
Requisite Ability The I.E. will only be required to be a member of a professional accounting body (CC31) where the church/ charity annual gross income is over £250k. Financial awareness and numeracy skills are considered essential, as is an understanding of the applicable accounting standards and principles. Knowledge of basic charity & fund accounting together with relevant practical finance related experience is also vital.
Who should not be appointed an I.E.? Spouses, partners, blood relatives or in laws of the church trustees are precluded from appointment. An employee of the church, major donor or anyone having a significant commercial relationship with a trustee is similarly excluded as arguably should be a church member.
Appointment Process
Appointment The I.E. reports to the trustees. It is, therefore the trustees who are responsible for the appointment. The appointment should be in writing, setting out the terms of reference, including any agreed fee. Reference to the relevant charity commission guidance notes CC31 & CC32 is advisable to ensure both parties understand what is required. The appointment should also be required in the trustee meeting minutes.
Confirmation of the appointment The I.E. should confirm the appointment in writing, including an understanding of the required scope of the work.
Importance The importance of this appointment should not be underestimated. It is frequently rushed and without adequate written confirmation. It is in the trustees’ interests to ensure that the external examination is carried out correctly and in a professional manner. Ultimately, this is their protection against malpractice and to demonstrate compliance with charity law and any denominational requirements.
Examination Process
The external examination process should proceed as follows.
Trustees approve the annual report and accounts.
I.E. commences the work.
I.E. liaises with the treasurer on any issue requiring clarification.
I.E. completes the work stating the basis of the examination and whether the I.E. report is qualified or not.
If the report is qualified, details of the reasons should be provided, if necessary, in a separate appended document.
If it is agreed beforehand a management incorporating informal observations can be issues to trustees
Publishing the TAR, Accounts & I.E. report
Final Stages The final stage in the process is for the Annual report, accounts, and Independent Examiner’s Report to be published and approved by church membership at AGM.
Help & Advice
These notes are not exhaustive. The relevant charity commission guidance notes, together with the ACAT website, should be consulted if necessary.
