By Hayes Knight – 7 May 2012

New mandatory requirements are being proposed for audit and other assurance of charity financial statements as part of the legislative shake-up that is impacting Not-for-Profit (NFP) entities in New Zealand.

What is happening and why?

As we have flagged in earlier articles; after a period of many years of relative stability there are number of changes on the horizon for NFP entities and their financial reporting in New Zealand.  Many of these changes will be locked into legislation and will progressively take affect over the next few years.

As a final piece in this legislative overhaul jigsaw the Ministry of Economic Development (MED) has now released their thoughts regarding auditing and assurance.  Late April saw the release of the MED’s discussion paper Auditing and Assurance for Larger Registered Charities. Responses to this will help inform the MED’s suggestions to Cabinet for proposed legislation.

While this proposed legislation is just directed towards registered charities its impact is likely to be felt wider.  In our view it is likely to set a “best practice” precedent within the wider NFP sector regarding the requirements for assurance over NFP entity annual financial statements.  Therefore we are anticipating that many NFP entities that are not registered charities will use the registered charity requirements for things such as audit and assurance as a benchmark for their organisations.

Accountability, transparency and comparability

Audit and assurance requirements are being proposed by the MED due to the perceived need for higher levels of transparency and accountability from the large charities. This is sound logic.

Fundamentally, accounting is about accountability. Charities are accountable to their stakeholders for the funds they raise and how they use these.  Accordingly if they wish to continue to enjoy the support of their stakeholders it is in their best interests to account clearly and well.  Linked to accountability are the important concepts of transparency and comparability.  Having standardised requirements such as common accounting standards that must be followed and a requirement for an independent audit, or other form of assurance, help achieve transparency and comparability in regards to the financial affairs of charities.

There is a lovely quote from a U.S. Supreme Court Justice Louis Brandeis that “Sunlight is the best disinfectant“.  To me this neatly encapsulates the concept of openness and transparency.  People who feel uncomfortable under the bright light of scrutiny and criticism often (usually?) have something to hide.   This is where the benefits of professional independent assurance comes in.

Audit and Assurance

Registered charities are currently obligated to include financial statements in their annual return, which they must then lodge with the Charities Commission.  However, at present there is no requirement for those financial statements to be audited or reviewed.  The primary reason for this is that there has been no mandatory requirement in the past to do so.  From a requirement perspective it is only the result of either provisions in entity constitutions or requirements of funding bodies that has led to entities in the sector being audited.

Instead of looking at this from a forced requirement perspective many enlightened charities, and in fact many in the wider NFP sector that are not charities but also raise funds from the public, have voluntarily had their financial statements audited.  They have chosen to do this for two key reasons: best practice governance and because it demonstrates a high level of credibility to stakeholders in regards to their financial statements.  Having professional auditors form an independent opinion over an entity’s financial statements helps assure readers that the financial information presented is fairly stated and therefore more reliable.

What has been proposed?

  • Most charities are small.  Hence the costs may outweigh the benefits for many.  However, in the case of the larger charities an audit requirement is proposed.  It is noted that the largest 4% of charities have annual operating expenditure of $2m or more.
  • There should be minimum qualifications of auditors and assurance providers to ensure robust quality.
  • To ensure the cost benefit equation is in balance there should be a lesser level of assurance required for some smaller entities.  A review engagement, which is not as detailed as an audit and therefore provides a lesser level of assurance at a lower cost, is proposed.  Suggested are:
    • Charities with annual operating expenditure of $200,000 or more would be required to have an audit or a review engagement completed
    • Carities with annual operating expenditure of $300,000 or more would be required to have an audit completed
    • Charities with annual operating expenditure under $200,000 should be able to choose what they wish to do, if anything.

Submissions from interested parties are due to the MED by 20 July 2012.  Read the discussion paper.