A Money-Saving Tip for Your Small to Medium Charity
By Frank Lieshout | 7 min read
As a person involved in providing charitable services, you will know that a charity is always chasing funds to meet its charitable purpose so rarely has spare funds to cover administration costs.
Obviously the one size fits all mantra doesn’t work in the charities space as our charities come in many shapes and sizes. Generally speaking, the bigger ones have economies of scale to, firstly make themselves known nationwide amidst a lot of “noise”, and secondly garner funding at a level that means they are in need of an audit.
Charities have Reporting Guidelines which you should be aware of.
Many years ago, it was common for annual accounts to be prepared by the treasurer (not always an accounting-savvy person) and if possible, the organisation had a “mate” or a “mate of a mate” prepare the audit because the constitution or trust deed said you needed an audit. If there was a cost it was most likely to be a gift or thank you to the person that did the audit.
After the collapse of Enron in 2001 the rules around auditing changed quite dramatically mainly in terms of who could do them and what the process was in conducting them. This lead to a lot of “mates” and even small to medium accounting firms exiting audits because of the new rules and process required to complete them.
This change in auditing requirements came with a larger price tag for audits than what the charitable organisations were able to pay. You could say that these changes brought into this space what is referred to as a ‘review engagement’.
The difference between what the “mates” used to do and what review practitioners do today is primarily adhering to regulations (still a flow-on from Enron) from membership bodies and regulators, through structure and process. While the outcome of the review may be the same as the “mates” audit, the time and effort required to get the result and the paperwork required to back up the outcome is like chalk and cheese.
You may be asking “What is the difference between an audit and review?” Both give a level of assurance regarding the financial statements; however, the difference is the level of assurance, the type of report provided, and the nature of the procedures.
|Level of assurance||A reasonable or high level of assurance about whether the financial statements as a whole are free from material errors or fraud. Reasonable or high assurance is not absolute assurance.||Limited assurance about whether the financial statements as a whole are free from material errors or fraud. Limited assurance is less than reasonable assurance.|
|Report provided||Independent Auditor’s Report
Opinion is expressed in a positive form, e.g. “The financial statements are free from material misstatement”.
|Independent Review Report
Conclusion is expressed in a negative form, e.g. “Nothing has come to our attention that causes us to believe that the financial statements are not free from material misstatement”.
|Nature of procedures||Procedures normally involve detailed tests of accounting records using techniques such as inspection, observation, confirmation, recalculation, and re-performance, as well as inquiry and analytical review.||Procedures are primarily based on inquiry and analytical review.|
Time doesn’t standstill. Not only has there been movement in the audit/review space, but we have also had a change in reporting requirements. created a mandatory set of new reporting requirements for everyone who produces financial statements in New Zealand (more on that next time).
“So, what if my charity doesn’t comply with the new regulations?”, you might be thinking. “Are there consequences?” Yes… from fines to possible de-registration. They can be fined up to $50,000 AND in certain cases, the individuals responsible for the governance of the charity (e.g., every officer/trustee/board or committee member) can also be held liable for the fine.
Not only is the proper preparation of the financial statements an issue, they must also be audited or reviewed by someone qualified to do so. A common question we get is whether the organisation’s financial statements need to be looked at and if so, which level of overview is needed – an audit or a review? Here are a couple of legal guidelines:
If your total operating expenditure for each of the previous two accounting periods was:
- over $500,000 (medium) – your financial statements must be either audited or reviewed by a qualified auditor; or
- over $1 million (large) – your financial statements must be audited by a qualified auditor.
A word of caution here though, if your charity is reliant on external funders, it is common for the funder to request the financial statements to be either audited or reviewed as a condition of the funding.
So, the money-saving tips are as simple as:
- a rule change – a review will be less expensive than an audit; and in some cases, nothing is required, so is less expensive than either one!
- specialist reviewer – find a professional who reviews rather than audits
- technology – the use of technology brings efficiency and less reliance on the location of the professional
- reviewer location – costs are less outside the main centres
If you’d like to know more about the variety of ways we can support your team, get in touch with us for more information.