For charities operating in Scotland, the regulatory requirements for financial scrutiny are critical to ensuring transparency and maintaining public trust. Depending on a charity’s income and structure, different levels of external scrutiny—namely independent examination or audit—may be required. This article explores when a Scottish charity can opt for an independent examination and when it must undergo an audit.
Independent Examination vs. Audit
Independent Examination
An independent examination is a less rigorous form of external scrutiny compared to an audit. It involves a review of the charity’s accounts and records to ensure they reflect the underlying transactions accurately. The independent examiner provides a report confirming whether any issues were identified during the examination. This form of scrutiny is typically suitable for smaller charities.
Audit
An audit is a more detailed and rigorous scrutiny process conducted by a qualified auditor. It involves extensive testing of the charity’s financial records and internal controls to provide a high level of assurance that the accounts are free from material misstatement. An audit is generally required for larger charities or those with more complex financial situations.
When Is an Independent Examination Appropriate?
A Scottish charity can opt for an independent examination if it meets the following conditions:
- Annual Income Threshold: The charity’s gross annual income is less than £500,000.
- Governing Document and Regulations: There is no requirement within the charity’s governing document or by funders for the accounts to be audited.
- Trustee Decision: The trustees decide that an independent examination is sufficient to provide the necessary assurance to stakeholders.
For charities with an income between £250,000 and £500,000, the independent examiner must be a member of a professional body listed in the Charities Accounts (Scotland) Regulations 2006. The Charity Finance Office holds a practising certificate from one of the recognised professional bodies, allowing us to conduct Independent Examinations up to £500,000.
When Is an Audit Required?
An audit is mandatory for a Scottish charity if:
- Annual Income Threshold: The charity’s gross annual income exceeds £500,000.
- Asset Threshold: The charity’s gross assets exceed £3.26 million and its gross annual income is over £250,000.
- Governing Document or Funders’ Requirement: The charity’s governing document, funders, or the charity trustees require an audit regardless of the income level.
- Legal Structure: The charity is a company or SCIO (Scottish Charitable Incorporated Organisation), where specific legal requirements necessitate an audit.
Key Points to Consider
- External Scrutiny Requirements: Trustees must ensure that their chosen form of scrutiny—whether independent examination or audit—complies with legal requirements and provides appropriate assurance to stakeholders.
- Choosing an Examiner or Auditor: For an independent examination, the examiner must be independent of the charity and, in certain cases, must belong to an approved professional body. For audits, the auditor must be a registered auditor.
- Impact on Stakeholders: The level of scrutiny should instill confidence in donors, beneficiaries, and the public about the charity’s financial health and integrity.
Conclusion
Understanding when to opt for an independent examination or an audit is essential for Scottish charities to comply with regulatory requirements and maintain public trust. Charities with annual incomes below £500,000 typically can choose an independent examination, while those exceeding this threshold or with significant assets must undergo an audit. Trustees should carefully consider their charity’s specific circumstances and seek professional advice if necessary to ensure compliance and effective financial management.
For further guidance, visit the OSCR website. This proactive approach will help your charity stay compliant and focused on its mission.