This helpsheet has been issued by ICAEW’s Technical Advisory Service to highlight the circumstances in which charity independent examiners, auditors and trustees have a duty to report to the charity regulator(s).

Members may also wish to refer to the following related helpsheet and guidance:

• Can I undertake an independent examination of a charity?
• Matters of material significance and reporting by auditors and independent examiners to the charity regulator

Auditors and independent examiners of charity accounts have a legal responsibility to report significant matters to the appropriate charity regulator(s): the Charity Commission for England and Wales (CCEW), the Scottish Charity Regulator (OSCR) and/or the Charity Commission for Northern Ireland (CCNI). This responsibility derives from applicable law:

• The Charities Act 2011 (sections 156 and 159);
• The Charities and Trustee Investment (Scotland) Act 2005 (section 46); and/or
• The Charities Act (Northern Ireland) 2008 (section 67).

The appropriate regulator will usually be the one with which the charity is registered and the one with which accounts should be filed. In the case of cross-border charities, if there is doubt about which regulator to report to (due to the fact the charity is registered in more than one jurisdiction), a report should be made to all relevant regulators.

The charity regulators collectively have published extensive guidance on Matters of material significance and reporting by auditors and independent examiners to the charity regulator. This helpsheet has been written based on the latest guidance published at the time of writing. All auditors and independent examiners of charity accounts (whether or not they are acting in a voluntary capacity) should familiarise themselves with this guidance.

Failure to report to the relevant regulator(s), where required to do so, may result in a complaint being made by the regulator(s) to the ICAEW Professional Conduct Department.

What are reportable matters of material significance?

There are nine reportable matters of material significance listed in the regulators’ guidance and as follows:

1. Dishonesty and fraud
Matters suggesting dishonesty or fraud involving a significant loss of, or a material risk to, charitable funds or assets.

2. Internal controls and governance
Failure(s) of internal controls, including failures(s) in charity governance that resulted in, or could give rise to, a material loss or misappropriation of charitable funds, or which leads to significant charitable funds being put at major risk.

3. Money laundering and criminal activity
Knowledge or suspicion that the charity or charitable funds including the charity’s bank account(s) have been used for money laundering or such funds are the proceeds of serious organised crime or that the charity is a conduit for criminal activity.

4. Support of terrorism
Matters leading to the knowledge or suspicion that the charity, its trustees, employees or assets, have been involved in or used to support terrorism or proscribed organisations in the UK or outside the UK, with the exception of matters related to a qualifying offence as defined by Section3(7) of the Northern Ireland (Sentences) Act 1998.

5. Risk to the charity’s beneficiaries
Evidence suggesting that in the way the charity carries out its work relating to the care and welfare of beneficiaries, the charity’s beneficiaries have been or were put at significant risk of abuse or mistreatment.

6. Breaches of law or the charity’s trusts
Single or recurring breach(es) of either a legislative requirement or of the charity’s trusts leading to material charitable funds being misapplied.

7. Breach of an order or direction made by a charity regulator
Evidence suggesting a deliberate or significant breach of an order or direction made by a charity regulator under statutory powers including suspending a charity trustee, prohibiting a particular transaction or activity or granting consent on particular terms involving significant charitable assets of liabilities.

8. Modified audit opinion or qualified independent examiner’s report
On making a modified audit opinion, emphasis of matter, material uncertainty related to going concern, or issuing of a qualified independent examiner’s report identifying matters of concern to which attention is drawn, notification of the nature of the modification/qualification/emphasis of matter or concern with supporting reasons including notification of the action taken, if any, by the trustees subsequent to that audit opinion, emphasis of matter or material uncertainty identified / independent examiner’s report.

However, if the matter is solely due to the exceptional circumstances of a national emergency, for example COVID-19, affecting the conduct of the audit or independent examination then this is not considered to be reportable as a matter of material significance. This is because remedying the situation is not in the power of the auditor, or examiner, the preparer of the charity’s accounts, or the charity regulator. Such exceptional circumstances may include travel or other restrictions preventing the auditor or examiner being able to perform their work or the control measures imposed to deal with a national emergency giving rise to limitations of scope.

9. Conflicts of interest and related party transactions
Evidence that significant conflicts of interest have not been managed appropriately by the trustees and/or related party transactions have not been fully disclosed in all the respects required by the applicable SORP, or applicable regulations.

Matters may fall within more than one of these categories. Further guidance on each is contained in Section 3: Matters in detail of the regulators’ guidance Matters of material significance and reporting by auditors and independent examiners to the charity regulator.

Timing of a report

The following table details when the regulator expects reports to be made.

Confidentiality

Auditors and independent examiners are required to adhere to the ICAEW Code of Ethics and, therefore, the fundamental principle of confidentiality. Since the duty to report matters of material significance to the charity regulator(s) is a legal obligation, auditors and independent examiners do not require their client’s consent to make a report to the regulator(s).

The regulators’ guidance states that their default preference is for auditors and independent examiners to adopt a ‘when in doubt, report it’ principle. However, care should be taken as members must not disclose confidential information without proper and specific authority, unless there is a legal or professional duty or right to disclose (paragraph R114.1 of the ICAEW Code of Ethics).

Situations involving suspicions of money laundering or terrorism

Reporting a matter of material significance relating to suspicions of money laundering or terrorism to the relevant charity regulator(s) is not tipping off and this should not, therefore, stop such a report being made. The regulators’ guidance acknowledges that such reports are highly sensitive and that any regulatory action taken by the relevant charity regulator is subject to prior clearance with law enforcement. It also confirms that the auditor or independent examiner can be assured that the handling of their report will not prejudice any investigation by law enforcement.

In addition to their reporting obligations to the charity regulator(s), auditors and independent examiners must also consider their obligations to make a Suspicious Activity Report (SAR). Further guidance is available in the CCAB Anti-money laundering guidance for the accountancy sector.

Discussing the matter with the client

In many (but not all) cases, it will be appropriate to discuss the matter and the need to make a report with the charity’s trustees – such discussion can help avoid potentially awkward conversations later down the line, should one of the regulators contact the charity about a report made by the auditor or independent examiner. Guidance for auditors (although similar principles would apply for independent examiners) is available in paragraphs 253 to 255 of Practice Note 11 (Revised) The audit of charities in the United Kingdom.

An auditor or independent examiner may also wish to alert the trustees of the charity to consider their obligations with regard to reporting serious incidents (see below).

In situations involving suspected money laundering, care must be taken to avoid tipping off. Further guidance is available in the helpsheet Anti-money laundering tipping off.

Charity trustees are expected to report serious incidents to the appropriate regulator - each has its own guidance:

• CCEW – How to report a serious incident in your charity
• OSCR – Notifiable events
• CCNI – Serious incident reporting

Although not the same thing, there is a significant overlap between serious incidents and matters of material significance. Charity trustees should ensure they are familiar with the relevant guidance.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Ethics Advisory Service on +44 (0)1908 248 250 or via webchat.