Charity Audit & Accounting Requirements

IMPORTANT: This post is specific to New Zealand. If you are not a New Zealand business/taxpayer then it is probably not applicable to you.

Currently, there is no requirement for a charity to have it’s accounts prepared to any standard (such as Generally Accepted Accounting Principles) or audited by an Accountant. While many do have an audit, it is mainly due to a requirement in their rules, or to requirements from funders. This is all set to change in 2015.

The Ministry of Business Innovation and Employment has sought public feedback and discussion over the last couple of years on the questions of both the format and criteria for preparing charity accounts and whether these accounts should be subject to audit. The consensus has been that charity accounts in New Zealand are not up to par and the public has a right to rely on these accounts when making decisions about their charitable donations and it is in the public interest to ensure that these accounts are true and fair. In September 2013 the Hon Craig Foss, Minister of Commerce, issued a press release announcing new audit requirements for registered charities. Expected to be in force for years starting 1 April 2015, charities will be required to have their accounts reviewed or audited as follows:

• Charities with annual expenditure of $1 million or more will be required to have a full Audit (this will effect about 10% of charities)
• Charities with annual expenditure of $500,000 to $1M will be required to have a Review (this will effect about 19% of charities)
• Charities with annual expenditure of less $500K will not be required to have an audit or a review

For the vast majority of charities (81%) there will be no requirement for either an audit or a review. But many will continue to get one because their rules require or their funders require it.
What’s the difference and why should I care?
An “audit” or “review” is a professional term governed by the Assurance Standards issued by (currently) the New Zealand Institute of Chartered Accountants (although this role is likely to be be transferred to the External Reporting Board at some stage). NZ synchronises it’s assurance standards with global standards, so ours are very robust and diligent.
An audit is the highest of the two standards. It requires the auditor to inspect the financial accounts and organisational records (not limited to the financial records) and express an opinion as to whether the financial accounts represent a true and fair view of the organisations’ financial position and performance. It requires the auditor to continue their work until they are able to reach an opinion – or state that they were unable to form one (which is a form of “qualification”).
A review is not quite as stringent. It requires that the reviewer perform a lower level of testing than an audit (there are some presribed tests) and then declare that nothing has come to their attention that would indicate that the accounts are not true and fair. This is often referred to as “negative assurance” because it is not making a positive statement and is limited to the things seen. The reviewer is not required to continue working until satisfied – they can stop as long as nothing suggest that anything is wrong. It is a lower standard, and therefore costs a bit less than an audit.
Once law, the above will be the minimum standards. Any organisation will be able to elect up the chain, but not down. For example, an organisation with no requirement for an audit or review will still be able to have a review done. Each organisation needs to determine whether the minimum standard is sufficient for them or whether they would like the additional level of work performed.
As a member of several non-profit Boards I like to know that an independent accountant has done a thorough inspection and given the all clear. It is good for the staff and volunteers to know that someone is actually watching (acts as a fraud deterrent) and also gives a high level of trust that the assets do in fact exist and that the Treasurer (a role I fill in two organisations) has not run off with the money!! While a Review gives some assurance on the existence of cash, only the audit gives this higher level.
The higher level of assurance you want, the higher the price tag is likely to be.
Who can do this work?
Currently there are no requirements as to who can act as an auditor/reviewer for non-profit organizations. Wile anyone can sign an audit report (I have seen my fair share of shonky audit reports!) Chartered Accountants are required to adhere to the NZ audit standards and their code of ethics as well as undergo ongoing professional development. Chartered Accountants in Public Practice are also required to undergo regular practice reviews and hold professional indemnity Insurance as part of their public practice. So even today there is an advantage to using a Chartered Accountant over an unqualified provider – but this does add to the cost.
The new proposal will tighten up on this. If an audit or review is required under the new structure then it must be performed by a Chartered Accountant (individually or under a Partnership, but not a company or a Trust). This means that many people currently doing audits will no longer be eligible to offer them. If you are not required to have an audit or review, but chose to have one done anyway, you may be able to appoint an unqualified auditor/reviewer.
What about changes to the reporting framework?
There have also been changes proposed to the reporting framework. Research suggests that NZ charities are pretty slack when it comes to preparing formal accounts. The Charities Act currently does not prescribe any framework for reporting. This too is set to change. The proposal is that all charities with expenditure over $2M will have to prepare General Purpose Financial Statements in accordance with standards. 95% of charities are under this threshold and therefore will have to prepare only “Simple Format Reports” using a prescribed layout and content. Charities with expenditure under $40K may report on a cash basis (otherwise an accrual basis).
If your charity is already preparing General Purpose Financial Statements then you may continue to do so. We recommend this approach to most charities.
What impact will this have on our charity?
This will depend on whether you have already prepared General Purpose Financial Statements and have an audit performed by a Chartered Accountant. If you are already do this then there is likely nothing that you need to do. However, if you have expenses over $500K and do not use a Chartered Accountant for your audit/review then you will need to change providers.
If you have expenses over $40K and your accounting process is not adequate to prepare proper account on an accrual basis then you will need to invest in upgrading these so that you can (even the Simple Format Reports” will need to have good accounting records behind them.
If your charity would like a professional provider helping with your accounting process and reporting, feel free to contact us at Business Express. We help several charities improve their processing and reporting.