FinOps Partners

Charity Audit or Independent Examination?

For charities, showing accountability and financial transparency to donors and stakeholders is essential. Unlike traditional businesses, which report only to their shareholders, these organisations rely on donations and public trust to attract funds, making it even more important for them to perform periodic financial checks. The evaluations need to be carried out by an independent evaluator; however, the level of scrutiny for each charity depends on its income level.

That leads us to a common dilemma many UK charity trustees face: should your charity opt for an independent examination or an audit? The law is clear: as long as your organisation’s gross income stays below £1 million and your gross assets below £3.26 million, you are not required to commission an audit.

In December 2024, the Charity Commission reported that 8,662 out of 170,705 registered charities are above the audit threshold, which sparked a debate on whether the threshold should be raised, seeing how due to inflation, more small charities are expected to reach the current value.

An independent examination costs less, so it is understandable why small not-for-profits would prefer staying below the threshold. However, it is vital to understand how each type of scrutiny works to make sure that your charity stays compliant.

What Is the Difference Between an Independent Examination and an Audit?

An independent examination is different from an audit mainly through the level of assurance it provides. If your charity is subjected to an independent examination, an independent examiner will review your accounting records to ensure there are no breaches of your obligations to the Charities Act 2011. The process is less complex than an audit and focuses only on providing limited assurance that your charity’s finances are in order. You still need to maintain accounting records (basic), but an independent examination takes less time and is cheaper.

An audit, on the other hand, requires maintaining comprehensive accounting records and having an auditor in charge of testing your charity’s financial systems. The audit will give your not-for-profit reasonable assurance that all financial statements are in order but will also provide an overview of how efficient your financial controls are in minimising the risk of fraud.

Sometimes, charities opt for an audit even when they aren’t required by the law. The reasons are varied: some trustees consider that subjecting their organisations to an audit can help them demonstrate their transparency and accountability to stakeholders, donors, and the public; in other cases, when the trustees are trying to attract new donors, those interested may require an audit to make sure the charity is financially healthy and can carry out its mission.

When Can Charities Opt for an Independent Examination Instead of an Audit?

The charity income threshold was last increased in 2015 via the Charities Act 2011 (Accounts and Audit) Order 2015. The current thresholds are:

• £1 million (raised from £500,000) gross income, applicable if your income is over £25,000.
• £3.26 million gross assets, applicable if your gross income is over £250,000.

Charities that have a gross income below £25,000 are not required to perform any type of external scrutiny. However, some charities, such as Parochial Church Councils, can be subject to external scrutiny requirements.

Some not-for-profits may need to perform an audit, even if they don’t meet any of the thresholds mentioned. Such cases appear when the governing document stipulates that the charity is required to perform audits. The good news is that, if you and your co-trustees consider your organisation only needs an independent examination, you can change the document to remove this provision.

Who Can Perform an Independent Examination?

The Charities Act 2011 describes an independent examiner as “an independent person who is reasonably believed by the trustees to have the requisite ability and practical experience to carry out a competent examination of the accounts”.

For charities with a gross income over £250,000, the examiner must be a member of the accountancy bodies listed in the Charities Act 2011, such as the Institute of Chartered Accountants in England and Wales or the Association of Chartered Certified Accountants. You can check the full list here.

For some trustees, a lack of in-depth understanding can make it difficult to appoint an appropriate examiner, leading to penalties from the Charity Commission. Let’s break down the two key elements of the legal definition provided above:

“an independent person”

It is essential that the examiner remains objective during the examination, so they should not have a close relationship with the charity. For example, a trustee cannot assume the role of an examiner because they can be influenced or perceived as influenced by their position within the organisation. The same logic applies to the charity’s accountant or employees as well as to members who are in charge of overseeing the charity’s finances.

Major donors or beneficiaries, organisations that have a commercial relationship with the charity, as well as individuals who have a close relationship with the trustees should also be excluded.

However, this doesn’t mean that the appointed examiner should have absolutely no connection to the charity. As long as the examiner is not involved in the charity’s regular financial operations and doesn’t have a close relationship with the trustees, it is acceptable to select them from the charity’s supporters.

“to have the requisite ability and practical experience to carry out a competent examination of the accounts”

A good examiner should have expertise in carrying out independent examinations, particularly in the charity sector. They should be familiar with the Charity Commission reporting regulations and understand the trustee’s responsibilities, as well as their responsibility to account for all the funds the charity receives. Try to find someone with experience, such as a specialist accountant for charities. You can ask charities around you if they have a recommendation.