It is that time of the year again where a lot of charities with a March year end (which seem to be very popular amongst the sector!) need to prepare for the statutory audit. We know how laborious the process can be for the management team, especially those in the finance function, but also recognise the importance the annual audit is for your organisation.
Aside from being an auditor, I am also a trustee of a charity and a member of their finance sub-committee. I hope to share some points to consider from an auditor’s as well as a trustee’s perspective on how to get most out of the statutory accounts and ensure it’s not merely a compliance exercise.
Being clear why you use statutory accounts
Do you use the statutory accounts for fundraising and communication, or are they merely a compliance exercise and you have other publications to showcase what your charity does? Depending on the answer, you will need different resources to compile the statutory accounts.
For charities who rely on grant funding from trusts and foundations, your statutory accounts are always used to assess your impact and financial sustainability as part of the grant application process. As such, the statutory accounts are therefore a powerful tool to secure funding for your charity.
Other stakeholders, including potential donors, supporters and partners, may also read the statutory accounts to determine if they want to support and work with your organisation.
You therefore need to identify what makes your statutory accounts truthful and yet stand out to these stakeholders. From my experience they will look for:
- Engaging and digestible content explaining your activities and the difference you try to make
- The measurable impact your charity makes
- A balanced review of your charity performance in the year, and any lessons learnt
- A concise summary of your finances in the year under review, and a well-articulated reserves policy
- The trustees’ report and the numbers in the accounts complement one another to explain how charity raises funds and spends money
It takes time and efforts to get them right. Make sure you involve the board, senior management and the communication team early in the audit preparation process to ensure the statutory accounts hit all the right spots for your stakeholders.
Providing the draft trustees’ report to your auditors early will give them time to review it properly and also make suggestions to ensure it is also a good document for fundraising and communications purposes.
I asked my charity to provide the board with the draft trustees’ report before it is shared with the auditors. This allows us to raise questions and propose amendments to the management team at the right stage of the audit, to give them time to address any concerns without impacting on the audit timetable typically at the end of the process.
Getting the board engaged in governance issues
There are always numerous items on the board meeting agenda, but often these relate to the programmes, activities and finances from an operational level and not so much on governance issues.
The SORP requires trustees to explain in the trustees’ report the governance structure, risk management, policies on investments, reserves adopted by the charity and, if you are a large company, how you manage relationships with stakeholders.
During the audit planning while the trustees’ report is being prepared, it is crucial time to remind the board to engage in these conversations, as it is their responsibility to provide effective governance to the charity.
For example, I often remind my audit clients that the reserves policy, which is a disclosure requirement in the trustees’ report, should be considered every year by the board as part of the budgeting process, and not just for complying with the SORP and for the audit. This is particularly important for long term financial planning, especially in recent years when we are faced with so many uncertainties, that the board reviews the charity’s risks and future plans regularly to determine the right level of reserves to protect the charity.
There have also been occasions where I noted there have been no references made to the Charity Governance Code in the trustees’ report. Although the compliance of the code is not mandatory, it is helpful for any charity to review the code and assess if there are any weaknesses in the charity’s governance and take remedial actions accordingly. The equality, diversity and inclusion conversation has been developing in the sector for several years now, and the Charity Governance Code can be a great starting opening point.
Knowing your audience
Recently I did some advisory work for a membership body where all members are scientists. Their trustees’ report and the accounts were long – the contents of the report went over and beyond the SORP requirements, and there were numerous additional notes in the accounts that put most of PLCs to shame. In short, their statutory financial statements read like a scientific journal that had been peer reviewed, albeit substituting all scientific terminologies to accounting ones!
As part of the research phase I asked the very accomplished finance team why there were additional contents in the trustees’ report and the accounts. The finance team explained that, as a membership body with a long history, the board had in various time in the last few decades requested additional information to the documents which they found helpful at particular moments in time. No one had raised any objections to the length or contents in the current finance team’s memory.
The charity was considered ‘rich’ and did not rely on funds raised from the general public, major donors or its own members. It also did not need to apply for funding from government bodies or trusts and foundations. So, the only readers of the accounts were really just their members. I asked further, were their members really that interested in the statutory accounts? The finance team looked at one another and confirmed yes, though I could sense the hesitancy in their answer.
As a lapsed scientist (ahem) I beg to disagree. The charity could strip the contents of the trustees’ report and the disclosures in the accounts back to basics, making the statutory accounts SORP compliant, and showcase their achievements in a more succinct and interesting ‘glossy’ that would genuinely interest members.
If your statutory accounts experience similar issues, do not be afraid to challenge the existing contents of the report and accounts. Just because ‘we have always done it this way’ does not make the report more useful for the audience. You may also be able to save yourself and your team more time to produce a set of simpler statutory accounts from now on.