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)
• For most financial year-ends in 2008, mainly charities which are not also registered as companies (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 your donor/funder)
• Charities that are ‘smaller’ …

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 per year for the year in question.

For account periods beginning on or before 26 February 2007, ie financial year-ends of 25 February 2008 or before (eg 31 December 2007) income and expenditure have to be in the range of £10,000 to £250,000 per year for the year for which the IE is being carried out and for the two proceeding financial years.

Click here to download a copy of our Scrutiny Thresholds paper

In Scotland

Independent Examination is a requirement for charities with income of up to £500,000 per year, for accounting periods which began on or after 1 April 2006 (the upper limit was £100,000 for pre-1 April 2006 accounts).

In Northern Ireland

Charity regulation is due to be introduced in Northern Ireland during 2008, at which point IE will be a requirement for charities with annual income of up to £500,000.

Asset tests

So far, ‘smaller’ has been defined by income (and expenditure). However, the assets which a charity owns also help define whether a charity require 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, if the charity’s annual income is over £100,000;
• In Scotland, for accounting periods from 1 April 2006, an audit will be required irrespective of the charity’s income;
• In Northern Ireland, once the relevant part of the new charity legislation has been implemented (some time during 2008), 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.
• 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 account periods beginning on or after 1 April 2008, the upper limit for income 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 some time later in 2008.

Charitable Incorporated Organisations (CIO’s) and SCIO’s in Scotland

The CIO (and SCIO) is a new legal form of charity which does not yet exist in practice. Once it does - the first possibly being registered in late 2008/early 2009 - CIO’s will sit under the IE regime if they meet the eligibility criteria. Scottish CIO's (SCIO's) are not expected to be brought into being until 2010.

What are the differences between Audit and Independent Examination?

As well as the difference in who can carry out an Independent Examination outlined above, 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);
• in England and Wales - and in Scotland for accounting periods from 1 April 2006 onwards - 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). We would expect this also to be the case in due course in Northern Ireland.

Benefits of Independent Examination?

• it is less work 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)

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