For Trustees' Week 2024, one of our charity specialists, Director Rory McCall, is adding to the theme of recruitment and retention by sharing knowledge with trustees.
First on Rory's list is audit thresholds.
Currently all Scottish charities with income in excess of £500,000 are subject to an audit of their annual accounts, as determined by Scottish charity legislation.
As soon as the charity’s income in any given year breaches that threshold, it falls within audit scope - there is no grace period for a year or two if this threshold is breached. It will then retain a requirement to have an audit undertaken annually until its income falls back below that level (if that indeed happens at all).
This differs from England & Wales where the audit threshold currently stands at £1million.
In recent years more and more charities have been breaching the audit threshold in Scotland.
This is a result of various factors, and in many cases is happening naturally as income levels rise over time due to inflationary factors, increased or one-off funding (such as receipt of a significant legacy) and many other causes. This is exacerbated by the fact the audit threshold has not been increased in a long time.
This is posing difficulties for many charities, both in terms of increased costs in what is already a challenging period financially, but also in recruiting an auditor in the first place.
Recent regulatory changes and revisions to auditing standards have led to a reduction in the number of audit firms and decreased capacity in the remaining firms to service the demand. Many charities have therefore found themselves at risk of being unable to produce audited accounts.
As a result of this, in an open letter to the Scottish Government, the Institute of Chartered Accountants of Scotland (ICAS) have called for a reassessment of the Scottish charity audit threshold. The Chief Executive of ICAS, J Bruce Cartwright said “Scottish charities have a significantly lower audit threshold than companies. For example, a company needs to have turnover of more than £10.2 million in a financial year before an audit is required, but a Scottish charity only needs to have gross income of £500,000 or more. The differential between these two thresholds only adds to the current challenges charities can face in finding an auditor. To assist with this problem, the Scottish government should urgently review the charity audit threshold.”
Calls to increase the threshold have since been echoed by the Association of Chartered Certified Accountants (ACCA), highlighting the role that the Independent Examination process (currently available to charities with income of less than £500,000) could play should the threshold be increased, noting “While these charities would still be subject to external scrutiny of their accounts via the Independent Examination process, a larger pool of professionally qualified accountants can provide this service, in comparison to an audit, where processes can take a lengthy period of time and specialist talent is required.”
Any reform to the charity audit threshold by the Scottish Government is likely some way off yet, however one of the key hurdles to overcome is likely to be the perception of decreased scrutiny and transparency in charity financial reporting, particularly for those who would fall out of audit scope because of such changes. Strengthening the independent examination regime and being more prescriptive about the work an independent examiner should undertake may be required before any change can be actioned.
A copy of ICAS’ letter can be found here, and ACCA’s release can be found here.
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