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PART THREE - PROPOSALS WHICH WE ARE NOT MINDED TO TAKE FORWARD AT THIS STAGE
90. This section discusses issues that have been brought to our attention as identifying potential problems with the existing regulations. We have considered these carefully, and are minded to conclude either that the existing regulations are sufficient to address these issues, or that now is not the time to address them. As before, we discuss these issues in the same order as they arise in the existing regulations.
Regulation 5 Filing deadline for submission of accounts to OSCR:cross-border charities
91. Regulation 5 requires charities to submit their accounts to OSCR within nine months of the end of their financial year. Similar regulations in England and Wales allow ten months for charities - though all companies (including charities) north and south of the border are required to submit their accounts within nine months. Charities working under the regulatory framework of both England and Scotland are therefore working to two different deadlines, of which ours is slightly tighter. It has therefore been suggested that Regulation 5 be amended to allow such "cross-border" charities to work to whichever deadline best suits their internal processes.
92. We are not convinced of the need to make a special case, and see greater value in retaining alignment with the company law framework. OSCR have also carried out a separate consultation into the regulation of cross-border charities which addresses a wider range of issues, and we do not feel it appropriate to address this issue in isolation. We therefore do not propose to amend Regulation 5 in this way at this time.
Regulation 6 Concern the requirement for parent charities preparing consolidated group accounts to also produce separate accounts makes reporting requirements for parent charities excessive and more complex
93. The Charities and Trustee Investment (Scotland) Act 2005 requires all charities to prepare and file accounts with OSCR. This is important both to OSCR, to ensure charities have proper internal control frameworks in place, and to offer reassurance to the public about the standing of individual charities.
94. The current regulations require consolidated accounts for the group and individual accounts for both the parent charity and each subsidiary - except that the regulations allow a single consolidated annual report (provided this covers the same information as if the individual charity members of the group, including the parent charity, had filed separate annual reports). The Regulator reports that on occasion parent charities have relied on the consolidated accounts Statement of Financial Activities ( SoFA) rather than including an additional SoFA for the parent charity alone. This would meet the reporting requirements for commercial organisations under Financial Reporting Standard 2 ( FRS2), but reduces the information available to the public on the parent charity itself, and leaves the regulator unable to identify the gross income figure for the parent charity.
95. This may be a teething problem as the new arrangements bed in, which will reduce over time. However, it would be possible to remove the requirement for a parent charity to produce accounts of its own. This could be done on the proviso that consolidated accounts include a parent charity balance sheet and set out income and expenditure information for the parent charity. As with connected charities (see page 17 above), the aim here would be to ensure all the required information is provided, but that charities have as much scope as possible to provide that information in a form suited to their own internal management arrangements.
96. We would welcome views on whether changes here would bring either greater clarity to the current regulatory requirements or useful extra flexibility for those parent charities preparing consolidated accounts.
Regulations 8 and 9 Accounting requirements for charities
97. It has been suggested that there may be benefit in drawing up a new form of accounting for charities, to sit alongside the SORP and Receipts and Payments accounts. This could meet the needs of smaller charities below the £100,000 threshold preparing accruals accounts either on a voluntary basis or at the request of funders.
98. While we recognise that such a change might benefit some charities, we believe there are significant drawbacks in allowing another set of different rules for charities, which could lead to difficulties for charities' relationships with funders and third parties. Our feeling is that the current system is widely understood and appears to be meeting charities' needs. We are therefore at present not minded to take this suggestion forward. We would again welcome views from those with experience of applying the current regulations.
Regulations 8 and 9 Annual Report scrutiny requirements
99. Regulations 8(1)(e) and 9(1)(d) both define the Annual Report as part of fully accrued accounts and receipts and payments accounts respectively. Regulations 10(2) and 11(1) sets out the requirement for accounts prepared in accordance with regulations 8 and 9 to be audited or independently examined. The effect of these regulations together is to make the Annual Report subject to audit or independent examination.
100. The current Scottish regulations are a direct reflection of the primary legislation. Section 44(1)(b) of the Charities and Trustees Investment (Scotland) Act 2005 sets out the duty of a charity to prepare "a statement of account, including a report on its activities in the financial year" and Section 44(1)(c) requires the charity to "have the statement of account independently examined or audited … in accordance with regulations under subsection (4)". The primary legislation thus itself places the annual report firmly within the scope of the audit or independent examination.
101. This is potentially problematic, since auditors and independent examiners work to frameworks not entirely appropriate for assessing the narrative body of the Trustees Annual Report, and this may in turn produce unnecessary compliance issues for charities. It is worth noting that this is an unusual requirement - for companies and other public sector bodies such as the Scottish Government itself, only the accounts would be subject to full audit scrutiny. The parallel regulatory framework in England and Wales also limits the audit requirement to the accounts, by treating the accounts and the annual report as separate requirements.
102. The 2005 Act gives wide discretion to Scottish Ministers over what can be covered in regulations. Section 44(4)(g) allows Scottish Ministers to make regulations about the "examination or audit of the statement of account." Section 44(5) allows regulations under section 44(4) to "include provision exempting charities of a particular type from some or all of the requirements of [Section 44]." However, our initial view is that this would not extend to exempting the annual report from audit or independent examination for all charities without an opportunity to amend the primary legislation which is not presently available, even if this were desirable.
103. Most concern has centred around the supposed requirement for auditors to include the Trustees Annual Report within the scope of the "true and fair" view. It is, however, not clear that the current Regulations require this. What is clear is that the annual report is within the scope of the audit or independent examination, and that the auditor or independent examiner is required to state:
i) whether or not the annual report meets the requirements of the regulations; and
ii) an opinion, where they have formed one, that there is a material inconsistency between the annual report and the rest of the statement of account.
Meeting the requirements of the regulations requires the annual report for a charity preparing fully accrued accounts to be prepared in accordance with the methods and principles set out in the Charities SORP. For a charity preparing receipts and payments accounts, the annual report must contain the information set out in Schedule 2 of the existing regulations. There is, thus, no specific requirement in the Act or the Regulations that would extend the "true and fair" view to cover the annual report. In contrast, the Regulations explicitly specify that the Statement of Financial Activities, the Balance Sheet, and other material in the Statement of Account must be "true and fair".
104. On the basis of the argument outlined above, the Scottish Government's provisional view is that the current regulations do not include the Trustees' Annual Report within the scope of the true and fair view - and that the auditor/independent examiner's focus should be on checking that the Trustees' Annual Report is fully consistent in all material respects with the accounts. OSCR have confirmed that they will accept auditors' reports that do not make a specific reference to having included the Trustees' Annual Report within the scope of the true and fair view.
105. Our understanding is that whilst ideally practitioners would want changes to the primary legislation to remove any possible uncertainty, confirmation of the Government's view and of the Regulator's approach should be sufficient to allay concerns here.
Schedule 3 Statement of balances
106. Schedule 3, paragraph 6 sets out the elements to be covered by the statement of balances within Receipts and Payments Accounts. It has been suggested that it might be possible to simplify these requirements without undermining the basic framework of the accounts, and that it might be helpful to make clear that as long as the information required is provided, this can be covered in the notes to the accounts rather than in the statement of balances itself.
107. Initial discussions have suggested that charities have not encountered issues with the current requirements of Schedule 3, and given that the existing regulations have now broadly bedded in, we do not want to introduce change or uncertainty unless where we see clear benefit to charities in doing so. We would welcome any comments on practical difficulties encountered in following the requirements of Schedule 3.
Question 17 Do you agree with our conclusion that the issues covered in Part 3 should not be addressed in the 2009 Amendment Regulations?
Question 18 Do you agree that it is not appropriate for the Annual Report to be subject to audit/independent examination beyond assessment of its consistency with the financial statements? Is legislative change needed to address any real world issues caused by the existing regulations?
Question 19 Are there any other issues with the existing regulations you think we should address?
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