After two Ministry of Business, Innovation and Employment (MBIE) discussion papers in early 2012 and 2013, and a fair bit of sector debate, the Government has now decided on their proposed legislation for assurance over the annual financial statements for large and medium sized charities.
What’s been decided?
In future registered charities with large expenditures will by law have to have their financial statements reviewed or audited by a qualified accountant. The size and respective levels of assurance criteria, which has been the topic of considerable debate in the sector, has finally been decided with:
- Large charities required to have their annual financial statements audited – “large” is defined as annual operating expenditure being of $1 million or more for each of the last two financial years.
- Medium charities will be required to have their annual financial statements reviewed audited – “medium” is defined as annual operating expenditure of:
- $500,000 or more expenditure for each of the last two financial years, and;
- not large
Charities with lower levels of expenditure can choose to have their financial statements reviewed or audited, or do neither, and submit unreviewed, unaudited accounts. Albeit, many smaller charities currently choose to have their annual financial statements audited via a requirement of their constitution or rules, at the request of a funding body, or just a desire to be able to demonstrate good governance practice.
The end of financial reporting regulatory reform is in sight
This is the final piece in this legislative overhaul jigsaw as regards financial reporting and assurance for charities in New Zealand. Originally legislated assurance for charities was intended to be part of the “who has to report” and “what accounting standards do they need to follow” reform that is encompassed in the Financial Reporting Bill 2013 currently before Parliament. However the issue of assurance for charities proved more difficult and contentious than expected, hence this became the subject of separate consideration and proposal papers.
The now announced proposed legislation is to be included in the Accounting Infrastructure Reform Bill which will amend the Charities Act. All registered charities are currently required to attach financial statements to their annual returns under the Charities Act. The Bill is expected to go to Select Committee later in 2013 and hopefully will be passed into law either late 2013 or early 2014. This will effectively catch up the other financial reporting reforms.
How many charities will this impact?
It is expected that the proposed legislation will only impact around 11% of the 26,000 currently registered charities in New Zealand totalling approximately 2,800 charities. Of these around 80% already obtain an independent assurance engagement over their annual financial statements. Hence the impact of this legislation is not expected to be significant. Rather it is just codifying in law what is already generally considered good practice.
When will the changes take effect?
Subject to confirmation in the legislation it is expected the changes will take effect for charities’ financial years starting on or after 1 April 2015. However charities who don’t currently have a requirement to get their accounts audited or reviewed can opt to have their accounts audited or reviewed if they wish.
More regulatory oversight in future
It has also been announced that from 2016, DIA Charities Services will monitor the financial information lodged by charities with their Annual Returns. From this statement we expect a greater degree of compliance monitoring to occur from this date. Contrary to popular belief currently this has not been occurring across all financial statements registered with DIA Charity Services. The reason being is there has not been legislation specifying what accounting and assurance standards had to be complied with by charities. Post the passing of the Financial Reporting Bill and the Accounting Infrastructure Reform Bill, DIA Charity Services will have clear requirements to monitor compliance against.
Other expected sector impacts?
Now that the levels for mandatory assurance have been set in law this may hopefully prompt some funding bodies to reassess their independent assurance requirements to determine if these are set at the appropriate levels. Currently the reason that many micro charities have their annual financial statements audited is as a requirement of a funding body.
At the risk of talking myself and my profession out of a job; the key criteria should be a cost benefit analysis of any such requirements. It may well be that an audit of the financial statements in full compliance with all auditing standards is no longer always deemed appropriate. However this does create the subsequent challenge of what is the best alternative for the funding body to obtain an appropriate level of assurance over their funding.