What is Independent Examination?
Definition
Independent Examination (IE) is an alternative to a financial full audit for smaller charities - a legally acceptable form of external scrutiny of their end of year accounts. The definitions of ‘smaller’ vary in different parts of the UK (see below).
Which charities are eligible for Independent Examination?
- Registered charities
- Excepted charities (often churches or scout or guide organisations)
- Many charities which are also registered as companies became eligible for IE for year-ends from 31 March 2009 onwards (see below)
- Charities whose governing documents/constitutions do not specify an ‘audit’
(NB: constitutions can be amended if this is the only stumbling block) - Charities where there is not a donor or funder who requires an ‘audit’
(NB: if they do require an ‘audit’, it may be worth negotiating with the donor/funder) - Charities that are ‘smaller’ (see below for detailed definitions)
Definitions of ‘smaller’ charities
In England and Wales
For accounting periods beginning on or after 27 February 2007, ie, financial year-ends of 26 February 2008 onwards (eg, 31 March 2008), income has to be in the range of £10,000 to £500,000 for the year in question. For accounting periods ending on or after
1 April 2009 (eg, year-end of 30 April 2009), the lower limit at which an IE becomes a legal requirement rises from income of £10,000 to £25,000.
Click here to download a copy of our Scrutiny Thresholds paper for England and Wales
In Scotland
Independent Examination is a requirement for all charities with income of up to £500,000 per year, for accounting periods which began on or after 1 April 2006.
Click here to download a copy of our Scrutiny Thresholds paper for Scotland
In Northern Ireland
Charity regulation has begun to be introduced in Northern Ireland with IE due to be introduced probably for accounting periods beginning on or after 1 April 2011 (year-ends of 31 March 2012) for charities with annual income of up to £500,000.
Asset tests
So far, ‘smaller’ has been defined by income. However, the assets which a charity owns can also help define whether a charity requires an IE or an audit. If a charity’s assets are £2.8m or more, then:
- In England and Wales, an audit will be required for accounting periods beginning on or after 27 February 2007, ie, for financial year-ends 26 February 2008 onwards (eg, 31 March 2008), if the charity’s annual income is over £100,000. (£3.26m assets and £250,000 income for accounting periods ending on/after 1 April 2009.);
- In Scotland, for accounting periods from 1 April 2006, an audit will be required irrespective of the charity’s income, if accruals accounts are prepared; (the relevant asset value rises to £3.26m for accounting periods beginning on or after 1 April 2011)
- In Northern Ireland, once the relevant part of the new charity legislation has been implemented, then it is expected that an audit will be required if the charity’s annual income is over £100,000.
Charitable companies
- In England and Wales, IE is a requirement for charitable companies with incomes of £10,000 to £500,000 for accounting periods starting on or after 1 April 2008, ie, for year-ends of 31 March 2009 onwards. For accounting periods ending on or after 1 April 2009 (eg, year-end of 30 April 2009), the lower limit at which an IE becomes a legal requirement rises from income of £10,000 to £25,000.
- In Scotland, IE is a requirement for charitable companies with income under £90,000 for accounting periods beginning on or after 1 April 2006. For accounting periods beginning on or after 1 April 2008, the upper income limit rises to £500,000.
- In Northern Ireland, it is anticipated that charitable companies with incomes up to £500,000 will be eligible for IE, once charity legislation is introduced, probably for accounting periods beginning on or after 1 April 2011.
Charitable Incorporated Organisations (CIO’s) and SCIO’s in Scotland
The CIO is a new legal form of charity which does not yet exist in practice. Once it does - the first possibly being registered in 2011 - CIO’s will sit under the IE regime if they meet the eligibility criteria. Scottish CIO’s (SCIO’s) are also not expected to be brought into being until sometime in 2011 at the earliest.
What are the differences between Audit and Independent Examination?
An audit can only be conducted by a registered auditor or audit firm. The other major differences lie in the level of scrutiny and the nature of the report:
- an independent examiner does not scrutinise a charity’s accounts to the same level as an audit (although the Charity Commission’s Directions still take the examiner through a 12-stage process and there is 6 step Guidance in Scotland);
- an independent examiner writes a report which gives negative assurance (‘no matter has come to my attention …’) rather than positive assurance (a ‘true and fair’ view).
Benefits of Independent Examination?
An IE is less work than an audit for all concerned, therefore, it should be cheaper, allowing charities to spend more time/money on good causes rather than on scrutiny.
(NB: An eligible charity can opt for an audit rather than an IE - but its Trustees should be able to justify that choice, particularly bearing in mind the extra expense incurred.)