A consultation that you really should respond to

At the consultation seminar in NICVA, DSD was very clear that it wants evidence in order to be persuaded to change from its preferred option on the income thresholds, so it really needs to hear from you.

DSD prefers that respondents use the online questionnaire which has been specifically designed to gather responses.  However the questions about the income thresholds that many organisations may be interested in commenting on are at the end of the questionnaire (online response Qs 22-26,consultation document Qs13-15). If you do not want to respond to all of the questions then you also have the option of submitting a response by email focusing on certain areas of the consultation to [email protected]

NICVA’s position is set out below, if you agree with our position then please feel free to use this to contribute to your own response. Please note that we have changed our position on the audit threshold from our recommendation in our briefing paper from £500,000 to £1m following our roundtable discussion.

NICVA’s position on the Charities (Accounts and Reports) Regulations (NI) 2015

While NICVA agrees that it is necessary to have regulations for the preparation and scrutiny of charity accounts it does not agree with DSD’s preferred options for the income thresholds. DSD has identified three different options for levels of scrutiny but its preferred option is the thresholds which are laid out in the Charities Act (NI) 2008 as laid out in Option 1 of Table1 below:

*Option 1: DSD’s preferred option

**Option 3: NICVA’s preferred option

Preparation of accounts

Proposal: All charities will have to prepare their accounts on either the accruals basis or the receipts and payments basis.

DSD is proposing that only charities with an income of under £100,000 be permitted to prepare their accounts on the receipts and payments basis.  NICVA believes that this threshold is too low and would ask that the threshold be increased from £100,000 to £250,000 to allow small to medium sized charities (non-company) to continue to prepare their accounts on a receipts and payments basis for the following reasons:

Complexity

Firstly, accruals accounts are complex and may not be easily understood by non-finance persons as opposed to receipts and payments accounts which are easier to understand.  This is especially important for many charity trustees who may not have the financial skill required to understand accrued accounts.

Cost

Secondly, there would be a cost to the charity as the preparation of accrued accounts is more detailed and complex than receipts and payments accounts.  In addition, accounts prepared on the accruals basis will have to conform to the Charities SORP (Statement of Recommended Practice) which again takes time and therefore cost to prepare.  This usually would require the services of an accounting professional with expertise in charity accounts if it there is no in-house expertise.

Charities have been waiting for a number of years on the accounting and audit requirements, it is imperative that we have regulations which are reasonable and proportionate for all charities.    Too low a threshold will only serve to add an extra unnecessary layer of cost and administration to charities which are already trying to comply with a variety of regulations and budget cuts from funding bodies.

The Department outlines in its consultation paper that there is no cost to its preferred option of keeping the threshold at £100,000 and refers to this as ‘the do nothing option’ however this is misleading as the £100,000 threshold is not currently in force for charities.  It exists in the Charities Act but this particular part of the legislation has not as yet been brought into force.  So currently non-company charities are only required to prepare their accounts on the receipts and payments basis (or income and expenditure) in accordance with current requirements. The bringing into being of the £100,000 threshold would therefore be new for charities so the economic assessment is inaccurate and not based on the real current situation for charities.   There would undoubtedly be a significant cost to a charity if it had to switch from receipts and payments accounts to preparing accruals accounts.

Alignment with other UK jurisdictions 

Finally, to align the threshold for the preparation of receipts and payments accounts with Scotland, England and Wales which is set at £250,000 to ensure a consistency for charities operating across borders.  The thresholds that are laid out in the Charities Act were consulted on nine years ago in 2006 as part of the wider consultation on the whole of the new legislative framework for charities.  The levels provided in the Act were in keeping with those in existence in England and Wales at the time of the consultation, but soon became outdated as thresholds were increased.  It was considered important then as it is now that we should try and align our accounting and audit requirements with other jurisdictions in the UK so as not to encumber charities working across the UK.

Audit or Independent Examination

Proposal: When the new regulations come in to force all charities, regardless of legal structure, will be required to have their annual accounts scrutinised by an external person, the level of scrutiny will depend on income of the charity.  The three different types of scrutiny are:

• An independent examination by someone the trustees feel has the requisite ability to carry this out
• An independent examination by someone who is professionally qualified
• A full audit

Table 2. NICVA’s preferred option for thresholds for audit or independent examination

* Gross assets of the charity should be considered when determining the method of external scrutiny.  If a charity has an income of £250,000 or more and gross assets of at least £3.26m then an audit should be required.

Independent examination by someone the trustees feel has the requisite ability

With regard to the independent examination of charities, NICVA asks that the income threshold be increased from DSD’s preferred option of £100,000 to a threshold of £250,000 to allow the charity trustees to appoint an independent person with the requisite ability and practical experience to carry out the examination.

Increasing the threshold to £250,000 will allow those with the relevant skills to be able to carry out this work for charities.  For example, people who work in finance offices in the preparation of accruals accounts may not necessarily have the required accounting qualification but may have the essential experience which is needed.  Small charities quite often have an independent examination carried by a volunteer at no cost to the charity.  If charities would have to get their accounts examined by a qualified person then there will probably be a cost involved which would result in more money being used on administration than for good causes.

An independent examination by someone who is professionally qualified

Proposal: DSD is proposing that charities with income between £100,000 - £500,000 must have an independent examination by a qualified person, or a full audit. Charities with an income over £500,000 must have a full audit.

Prior to the roundtable discussion following the consultation seminar, NICVA agreed that the audit threshold should be £500,000 however after considering the discussion at the roundtable discussion, NICVA has been persuaded that a threshold of £1million is more appropriate for charities.  This is based on a number of reasons:

Cost

Auditors and accounting professionals participating in the roundtable discussion outlined the cost that is involved in carrying out an audit.   In particular, they were concerned at the cost to charities with trading subsidiaries which would be obliged to have an audit if the aggregate income of all its enterprises were over the audit threshold, even though individually, the enterprises’ income may not be significant.  NICVA believes that charities should not be expected to pay thousands of pounds for itself and then thousands more for each of its enterprises as this would not be proportionate to the size of the enterprises.

Charities already have an administrative burden placed on them by funders as they quite often require detailed monitoring reports to ensure that their money is being spent as it should.

Alignment with England and Wales

The £1m threshold for statutory audit has recently been agreed in England and Wales. There appears to have been strong support for the introduction of the £1m threshold with recognition that some charities may continue to have their accounts audited either by a requirement of a funder or by their own members.  It is important that we have consistency for charities working across borders.  It also raises the question as to why our government department thinks that charities in Northern Ireland need to have stricter audit requirements than our counterparts in other jurisdictions.

Asset threshold

The Charities Act does not require charities to take the value of a charity’s assets into consideration when determining if a full audit is required, unlike our neighbours in the UK.  At the roundtable discussion, it was felt that an asset threshold should be introduced especially if the audit threshold was to be increased to £1m.  In England and Wales, an audit is required if the aggregate value of a charity's assets is £3.26m and it has an income of £250,000 or over.  Scotland has the same asset threshold of £3.26m but it applies to all charities that prepare their accounts on the accruals basis and not on the income of the charity.  NICVA recommends aligning with the regulations in England and Wales to require a charity with an income of over £250,000 and assets of £3.26m to carry out a full audit.

Independent examination provides an acceptable level of assurance

While an independent examination is a simpler and less detailed form of scrutiny than a full audit, it is much more detailed than a simple informal look over the accounts, it can provide an acceptable level of assurance when carried out properly.  The form and content of an independent examination requires that an independent examiner follows a structured approach and reports on specific matters.

Given the detailed scrutiny of the independent examination in itself, it should then be up to the charity trustees to ensure that they appoint the appropriate person.  For example, an Independent Examiner would need to have considerable accounting experience to be able to carry out a competent examination of the accruals accounts of a charity.  The Charity Commission has already indicated that it will be publishing guidance which will be extremely useful in helping charity trustees to understand the independent examination process.

More information on this consultation

This article only covers the areas where NICVA’s position differs with that of DSD’s preferred options.  For full detailed information about this consultation please see www.dsdni.gov.uk/consultations/accounting-and-reporting-by-charities

Please email responses to [email protected] or use the online questionnaire at https://www.dsdni.gov.uk/consultations/accounting-and-reporting-by-charities

The deadline for responses to the Department’s consultation are required no later than 30 October 2015. 

NICVA's full response to the consultation is available here.