Auditing financial statements without a true and fair opinion: assessing the effectiveness of charity independent examiners

The Charities Acts 1992 and 1993 introduced for the first time in the UK a general statutory regime for scrutiny of charity accounts (Morgan 1999; Picarda 2001). The legislation requires charities over ,250,000 income to have their accounts audited by a registered auditor, but this only applies to around 7% of registered charities (Charity Commission 2004b). Below this a charity may opt for an independent examination of its accounts. The independent examiner (IE) is undertaking an “audit role”, but is not required to express and opinion as to whether or not the charity’s accounts give a true and fair view. This regime means that many charities can opt for scrutiny of their accounts by individuals drawn from within the charity sector, frequently volunteers, rather than engaging external accountants – it can be seen as a lay audit role function. But although the IE does not give a true and fair opinion, by law the IE must follow a 12 stage process and the IE’s report must address a range of issues, including opinions in up to seven areas. A decade after its introduction, the paper reports on the operation of independent examination, and discusses planned policy developments. A new Charities Bill which is now before Parliament (House of Lords 2004) proposes an increase to £500,000 in the upper income limit for independent examination, but with a requirement that for larger charities within the independent examination range,the IE must hold a relevant professional qualification. So what began as a “lay” role is arguably becoming a semi-professional role. The paper seeks to investigate the effectiveness of the independent examination regime, drawing both on theory and fieldwork, and seeks to consider how it will develop in the light of these proposed changes. The fieldwork spans a seven year period, beginning with a series of qualitative studies of independent examiners, and leading on to a study of 700 registered charities: where these charities met the criteria for independent examination, their accounts were individually inspected and assessed in terms of a range of variables. The main conclusion is that the UK independent examination regime offers a potentially rigorous approach to scrutiny of charity accounts, and even though the IE does not express a true and fair view, the process is much closer to an audit than might be supposed. Based on the limited measures used in this study, the regime appears to be working, and standards have improved considerably since an earlier, smaller study (Morgan 2000). It therefore appears that the case for increasing the threshold is well justified, provide the professional qualification requirement is broad enough to include individuals with a voluntary sector background.