The Charity Commission has found that, of the 114 auditors who gave audit opinions containing information they were required to report to the regulator in the six months to October 2017, only 28 contacted the Commission.

Auditors are required to report to the relevant charity regulator where an auditor's report issued on or after 1 May 2017 contains a modified opinion, a paragraph highlighting a material uncertainty related to going concern, or an emphasis of matter.

The Commission carried out a text search to identify all the charities that had submitted sets of accounts in the period 1 May - 31 October 2017 containing one of the headings which auditors are required to use when issuing a modified audit opinion or one of the other reporting paragraphs.

This list was then compared with the Commission’s list of reports from auditors up to 11 December 2017, to see whether a report had been filed.

In its analysis, the Commission said: ‘This low level of reporting by auditors is of significant concern, particularly in the context of the findings of the Public Administration and Constitutional Affairs Committee into the collapse of Kids Company.

‘It also raises the question of whether the other eight reportable matters listed in the guidance are also under-reported.’

Only six of the 28 auditor reports were received promptly, measured as being no later than one day after the audit report was signed. Of the remainder, half were received within two weeks, but five were not lodged with the Commission for two months and three took longer than that.

The Commission pointed out that seven of the 114 charities where issues were identified went on to wait over 100 days to file their accounts, arguing that prompt reporting by auditors could mean that the Commission receives information about potential regulatory concerns at a charity significantly earlier than waiting until the charity files its accounts. 

Michelle Russell, director of investigations and enforcement at the Charity Commission, said: ‘This review shows that, at this time, too few auditors are complying with their statutory duty to report matters of material significance to us as soon as they identify them.

‘This potentially puts charities at risk. It is important that we identified and responded to this quickly and so we are working with the accountancy profession to help raise awareness of auditors’ reporting requirements and ensure they meet them.’

ICAEW regulated firms gave the majority of reportable opinions in the period, while the remainder were handled by ACCA members.

The Commission says it is writing to all of the firms or practitioners that did not file a report, reminding them of their responsibility to report a matter of material significance and asking them to explain why they have not done so.

It is also developing a formal framework with the ICAEW and the ACCA to share information on trends in reporting, including those of poor practice by their members, under a memorandum of understanding. This may include the failure to report a matter of material significance to the regulator.

ACCA has welcomed the report, saying that ‘there is a responsibility on the profession to uphold the highest of standards’ and that it would work with the regulator to ‘ensure the value of audit and all reporting for the charity sector remains a top priority’.

The Financial Reporting Council (FRC) has also said it will be working with the audit professional bodies and the charities regulators to promote and enforce these reporting requirements.

The regulator said: ‘The FRC reminds auditors of charities that they are required to carry out their audit in compliance not only with the FRC's ethical and auditing standards, but also applicable legal and regulatory requirements.

‘In order to do so, the auditor is required to have an understanding of the legal and regulatory framework applicable to the charity and the sector in which it operates, such that the auditor would be able to identify situations which may give the auditor reasonable cause to believe that a matter should be reported to a charity regulator.

‘This includes being familiar with the charity regulators' guidance on reporting matters of material significance and other relevant charity regulators' guidance.’

Charity Commission accounts monitoring review, Reporting of matters of material significance by auditors is here.

FRC Practice Note 11 (Revised) The audit of charities in the United Kingdom is here.

Report by Pat Sweet