By Hayes Knight – 21 May 2012

Mandatory audit and other assurance of charity financial statements is being proposed as part of the legislative shake-up that is impacting Not-for-Profit (NFP) entities in New Zealand. So what’s happening and why?

As featured in the Chartered Accountants Journal.

After many years of relative stability there are now a 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.

In one of the last pieces in this legislative overhaul jigsaw the Ministry of Economic Development (MED) has now released their thoughts regarding auditing and assurance relating to charities.  Late April saw the release of the MED’s discussion paper Auditing and Assurance for Larger Registered Charities. Responses to this paper 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 audit and assurance as a benchmark for their organisations, especially those seeking to raise funds from the public and others funders.

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 should be 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 independent assurance, help achieve transparency and comparability in regard 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“.  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 required by the Charities Commission to include financial statements in their annual return.  The Charities Commission then loads these financial statements lodged with them on their website to allow public viewing.  However, at present there is no requirement either from legislation or from the Charities Commission 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 the charities’ own constitutions or specific requirements of funding bodies that has led to entities in the sector being audited.

However if you consider this from a Government perspective this lack of mandatory assurance is an anomaly. The Government is a significant stakeholder in charities in New Zealand.  By granting them registered charitable status the Government is providing charities with a significant tax favour; that of income tax exemption and donee status.  Accordingly it makes sense for the Government to be concerned that this tax favour is not being abused.  One way to help achieve this is to require charities by legislation to follow recognised accounting standards and to require some independent assurance over their annual financial statements.

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 as regards 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’s proposed by the MED’s discussion document?

Horses for courses

The majority of the just over 25,000 registered charities in New Zealand charities are small.  Hence the costs of mandatory assurance may outweigh the benefits for many.  It is heartening that the MED have recognised this reality.  However, in the case of the larger charities some form of mandatory assurance requirement is proposed.  Thanks to the register run by the Charities Commission we finally in New Zealand have a reasonably reliable information set on which to better understand the nature and scale of charities in New Zealand.  It is noted that only the largest 4% of charities have annual operating expenditure of $2m or more.

To ensure the cost benefit equation is in balance it is proposed that there should be different tiers of assurance; audit for the larger charities, a lesser level of assurance required for some smaller entities, and none at all for the micro entities.

If not an audit then what?

A review engagement, which involves a lesser level of work than an audit and therefore provides a lesser level of assurance at a lower cost, is proposed as the less than audit option.  Reviews are an internationally recognised, albeit not highly used, form of assurance.  The review engagement standards also have the advantage of currently being under revision at an international level so by the time this legislation is effective there should be recently updated review standards available in New Zealand.

Who has to do what?

Size and scope of operations of the charity are seen as the proxy for determining their assurance requirements.  In line with earlier discussion documents which have canvassed this point the MED is suggesting annual operating expenditure is the most reliable measure of a charity’s activity. This is as opposed to annual revenue which tends to be more variable from year to year, and total assets which can include many not used for economic purposes such as heritage assets, and employees as this number is clouded in the sector by the use of volunteers.  The logic of using annual operating expenditure seems well accepted in the sector.

As regards dollar levels the following are suggested by the MED:

  • Charities with annual operating expenditure of $300,000 or more would be required to have an audit completed
  • Charities with annual operating expenditure of $200,000 or more would be required to have an audit or a review engagement completed
  • Charities with annual operating expenditure under $200,000 should be able to choose what they wish to do, if anything.

Given these are arbitrary levels that will impact compliance costs they are likely to generate some debate.  Also important is that any levels set will be reviewed in the future to ensure they remain appropriate.

Who should provide the assurance?

The skills and qualifications of those providing independent assurance has an impact on the level of reliability that stakeholders can take from their work.  However many stakeholders are not qualified to assess the skills of the assurance provider.  Accordingly logic would dictate that there should be minimum recognised qualifications of auditors and assurance providers to help ensure robust quality.


The audit and assurance proposals put forward by the MED are the result of a lot of consideration and previous discussion on this topic within the sector over a number of years.  As such the proposals put forward are unlikely to be very controversial, especially if one accepts the proposition that charities receiving tax favours from the government should be required to be transparent and accountable in their financial reporting.  However, as with any proposed legislative change it is important that impacted parties are aware of what is proposed and exercise their democratic right to have a say on the proposals.

Submissions from interested parties are due to the MED by 20 July 2012 and the MED is required to report to Cabinet by 30 September 2012

The discussion paper can be read online.