CPA Australia Podcast Transcript - Episode 36

Transcription

1 CPA Australia Podcast Transcript - Episode 36 Intro: Hello and welcome to the CPA Australia Podcast, your source for business, leadership, and public practise accounting information. Welcome to the CPA Australia Podcast on why charities are opting for audits instead of reviews of their financial reports. I'm Claire Grayston, CPA Australia's policy advisor on audit and assurance and with me is Mel Yates, director of reporting in red tape reduction at the Australian Charities and Not for Profit Commission. Thank you, Mel, for joining us. Thank you very much for having me. Firstly, I note that not all charities are required to have an audit annually over their financial report. So, perhaps you could outline the requirements for different charities? Absolutely. So what we'll talk about today is the ACNC reporting framework. So a note that there are currently transitional reporting arrangements in place, so for ACNC, registered charities that might be an incorporated association with a state or territory, or a cooperative or a charitable fundraising organisation, in many cases, those organisations can submit the same financial report that might be prepared for another state or territory regulator. Even if it doesn't meet the ACNC reporting requirements, they can still submit that to the ACNC, so I just want to put that condition out there, but in terms of the ACNC reporting framework, the size of a charity is based on the annual revenue for the reporting period. So small charities are those with revenue of up to $ Medium charities are those with a revenue of $ up to $1 million, and then large charities are those with a revenue of $1 million or more. So essentially, what we're talking about really is that medium category where the revenue is $250000, up to $1 million. Now, those charities can either have a review done or they can get an audit done if they would like, whereas large charities with $1 million or more, they have to have an audit of their financial reports. So you've just said that medium charities can obtain an audit or a review. Can you explain the difference between these two types of engagements? Yeah, absolutely. A review, on one hand, really provides limited assurance and it would generally involve less detailed procedures, so the assurance practitioner or the person who's conducting the review would need to state whether anything came to their attention that causes them to believe the financial report does not meet the requirements of the ACNC Act, and that's in all material aspects. A review conclusion is a lower level of assurance than an audit

2 opinion, and if we compare that to an audit, an audit is a positive opinion as to whether the charity's financial report meets the requirements of the ACNC Act. Now, in terms of a review, so a review, when a review is done, the charity still needs to provide all of the information, explanation, and assistance that might be needed by the person who's performing the review. Charity still needs to keep all financial records so that a financial report can be prepared and it is able to be reviewed, and they also have the standard record keeping requirements under the ACNC act. So the difference between the two is really the level of assurance that is provided. So given there's a high level of assurance for an audit and a lower level of assurance for review, how would a charity choose between the two? That's a really good question. So, some of the things that a charity might think about is what level of assurance do they want? Are they comfortable with limited assurance or do they want a more positive opinion and therefore, do they want an audit conducted? Also, what we find is that many charities, within their constitution or their rules, actually have a requirement to have an audit of their financial report, so that's up to charities because they have the ability to potentially change their constitution or change their rules so that they may not need an audit of their financial report. Other considerations would involve cost, so generally speaking, an audit would be more costly than a review. There's also the time requirements and other resources which may be required to complete an audit, which would generally be longer than a review, and it's also accessibility as to who can provide a review or an audit. So, if we think about some charities which may be in perhaps remote or isolated locations, they may not have the same options available to a charity that might be located in perhaps Sydney or Melbourne in terms of getting the expertise to complete the review or the audit that they need to have done. So who can conduct an audit or a review of a charity? Sure. So a review, first of all, which is an option for medium-sized charities, a registered company auditor, an audit firm, an authorised audit company, or a current member of a relevant professional body. So in the case of CPA Australia, someone who holds a CPA or FCPA designation is able to complete a review for a medium charity. Now in terms of an audit, an audit must be undertaken by a registered company auditor, an audit firm, or an authorised audit company. Now what is the same for both a review and an audit is that there needs to be independence, so the reviewer or the auditor has to complete an independence declaration as part of the engagement in both cases. So that applies for both a review and an audit, and that's really outlining that there's not been any contraventions of any applicable code of professional conduct in respect of the

3 engagement, or the only contraventions of any applicable codes of professional conduct are those explained within the declaration itself. So you mentioned that if an audit is conducted, that the charity needs to use a registered company auditor, but if a small charity, which isn't required to have an audit or a review, elects to prepare a financial report and obtain an audit, will they also need to use a registered company auditor? That's a really good question, Claire, because what we find is that there is a different definition of audit, so in the context of the ACNC reporting framework, we've just outlined that an audit has to be done by a registered company auditor, an audit firm, or an authorised audit company, but in some of the states and territories, the term audit refers to what we consider a lower level of assurance and what we equate to something like a review, so who can conduct a review is a wider population and includes members of the professional bodies, for example CPA Australia, someone who holds a CPA or FCPA designation. So it's an interesting question that you refer to small charities and whether they do need to have their financial report audited because under the ACNC reporting framework, if a small charity prepares financial reports, then there's no assurance requirements associated with those, but under the ACNC reporting framework, it specifies who needs to undertake the audit, and it also specifies that the audit needs to be conducted in accordance with auditing standards, so we have this funny situation where small charities don't have a mandatory requirement to submit a financial report or get an audit, but where the charity provides the reports to the ACNC, we'll publish them on the charity register, and obviously there aren't mandatory assurance requirements, but under the ACNC legislation, it does say that where an audit is completed, it has to be completed by a certain population of individuals and it has to meet auditing standards. Now, I can categorically say that we would not take any action in relation to a small charity if they didn't meet the auditing requirements under the ACNC reporting framework, but as I mentioned a bit earlier, it's a really interesting point because between the ACNC reporting framework and some of the other state and territory frameworks, there is that difference in what an audit actually means. So it sounds like small charities need to be well aware when they choose to have an audit conducted what the implications are for them and whether they're meeting the appropriate requirements of the ACNC Act. Mm-hmm (affirmative). Now, as the audits provide the highest level of assurance, what is the reason that the legislation does not require audits for all charities?

4 Good question. So the ACNC reporting framework really adopts a tiered approach to reporting. So the annual information statement is a requirement for all sizes of charity to complete each year, but the reporting requirements in relation to financial reports, they get introduced for medium-size charities and they also apply to large-size charities, and in a similar way, the assurance obligations that are associated with the financial report, they also get introduced at medium-size and they increase for large-size charities. So, we've already established that a review can be an option for medium charities, but for a large charity then, an audit needs to be undertaken. Now, the ACNC reporting framework mirrors that of the companies limited by a guarantee, so that was taken from the Corporations Act, and while it wasn't referenced specifically within the ACNC legislation, if we look at the explanatory memorandum from the Corporations Act, there's a reference to introducing reviews to reduce the time and cost associated with having the financial statements audited whilst ensuring that the financial information is still subject to what's an appropriate degree of assurance. So, I guess if we think about the tiered approach, I think that that comes through and that's mirrored there quite well. We also have an obligation under our legislative framework to reduce unnecessary regulatory burden on charities and really, that is assisting charities to comply with the reporting framework requirements by balancing the assurance requirements alongside the scale of the charity and the size that it is. What proportion of medium charities are taking advantage of this red tape reduction opportunity available in obtaining a review instead of an audit? The University of New South Wales have done some research and they've found that around 6% of medium charities opt for a review as opposed to an audit, and we've also done what I would say some limited internal analysis and we've found that a maximum of 10% of medium charities opt for a review, so it is a small number. I wouldn't say it's a large number of medium charities that do take advantage of the option to get a review. So, if allowing reviews instead of audits for medium charities is intended to be less onerous, as you were explaining before, why are most medium charities not obtaining reviews? Well, that's a very good question. So, there could be a number of things, and I'll touch on a couple of them. The term review, it may not be fully understood by the sector, so there might be a little bit of misunderstanding about what a review actually is, and also I mentioned earlier, there's that inconsistency across the ACNC reporting framework with some of the states and territories about the terminology of audit, and so what we consider a review would match many of the state and territory requirements in terms of the assurance that's required under those state and territory frameworks.

5 There also is the possibility that many charities view an audit as part of good governance, so they want that level of assurance for their financial reports. There's also the option that charities who report to another regulator, so for example, incorporated associations, they might have a requirement for an audit, but really, the audit is, as I mentioned, at the ACNC level for a review, and anecdotally, we have spoken to a number of charities recently who are now only reporting to the ACNC, so the reporting has been switched off to their state and territory regulator, but they are choosing to retain the option, and they still want to have an audit done of their accounts. So, it's an interesting one. Also, if we think about ancillary funds, ancillary funds were required to have an audit irrespective of the size of the entity previously, and it wasn't until 2016 that amendments were made so that a private ancillary fund with revenue of assets of less than $1 million may instead have its financial statements and compliance with these guidelines reviewed rather than obtaining an audit. So, there's a number of things which have happened over the past little while, but really there's no definitive answer, I don't think, as to why most medium charities are choosing to retain their audit rather than get a review done. So that sounds like some are making a conscious decision to have an audit. Do you think, nevertheless, something needs to be done to encourage medium charities to obtain reviews instead of audits? So, this really is a decision for each medium-size charity, to decide the level of assurance that they want, and as long as they meet the minimum assurance requirements under the ACNC reporting framework. As I've mentioned, some charities may decide that they still want an audit undertake and they still want that positive assurance, and there might be other regulatory requirements in addition to the ACNC framework. So, there are a number of things at play here, but I think the work that is being done by both CPA, by the Auditing and Assurance Standards Board, and also within the ACNC to I guess increase the awareness of the option to have a review of financial reports are real positive things for the medium-size charities. Yes, I was gonna ask about any steps that ACNC were taking to support reviews and whether others might need to take some action. You did mention the AUASB and obviously we've been raising awareness ourselves here at CPA Australia, but are there other steps, do you think, need to be taken? The ACNC has provided guidance about this. We've developed a lot of information, which is available on our website, and I'll also provide a link, which will be on the podcast page, but I think one of the big stakeholders in this whole manner are the professionals who support the sector, so it's members of CPA who are conducting the audits and who have the opportunity to conduct a review of a financial report on behalf of their registered charities who might be clients of theirs, and perhaps pointing out the differences between what a review is and an audit and having that conversation, and allowing the charities

6 to really make an informed decision about what meets their needs and what's best for the individual charity. Yeah. So the professional advisor has a very big role to play there in advising the charities and what might be the right approach for them? Absolutely. Alternatively, do you think consideration needs to be given to changing the requirements? For example, if reviews are not meeting the needs of users, if that was perhaps the reason they're not being used very often, could they be replaced by an alternative engagement such as a compilation where a member of a professional body goes in and actually assists in the preparation of the financial report of the charity? Yeah, well this is an interesting one because I can't say definitively that reviews are not meeting the needs of users, so it's a hard one to talk about because I think we still need to sort of do a little bit more analysis and a bit more research into this, and I'm really happy that there is some research being done within the likes of University of New South Wales about this issue. There could be a lack of awareness, so it could be that medium-size charities really are unaware that they do have the option of having a review done of their financial report, and they might just think that they do have to have an audit done. Now, in terms of you mentioned a compilation, so because a compilation doesn't provide assurance on the financial reports, that probably wouldn't be an appropriate type of engagement within the current ACNC reporting framework, but potentially, that could be something which is an option in the future, and it takes me onto the next point, Claire, because I'm not sure whether the people are aware, but the ACNC will be subject to a legislative review, and that's expected to start later this year, in December of Now the terms of reference for that review have not yet been released and it's a review that's based on the first five years of the operation of the ACNC legislation, so potentially, some of these things could come up within the context of the legislative review. So very soon is the time for practitioners and other stakeholders to speak up about what they think about the thresholds and the assurance requirements? Absolutely. It's very timely. Just to finish off, what is the ACNC's role in the oversight of auditors conducting audits and reviews and charities? Yeah. So, oversight of registered company auditors, that falls within the responsibility of ASIC, and ASIC does have a register and there's a lot of information that's available on the ASIC website about registered company

7 auditors. So, what we do is we undertake an annual project that involves a detailed analysis of financial reporting across a sample of ACNC registered charities, and out of that project, we identify some non-compliance with accounting standards generally, but we also look to make sure that the charity has complied with the ACNC requirements in terms of the assurance that's provided. Where we do identify issues, we do contact charities and we require those issues to be resolved, and by and large, those issues are very quickly and easily resolved, and generally, it relates to providing incorrect information or providing the wrong document, for example, so the charity will have the correct document, but they just haven't provided that to us as part of their reporting. Now, we also meet regularly with professional associations, so with the likes of CPA, so we do have that ongoing dialogue, which is really constructive and really beneficial for the sector. We also meet regularly with the Auditing and Assurance Standards Board, so we definitely have opportunities to raise any concerns that we identify on a regular basis. Outro: Mm-hmm (affirmative). Well, thank you very much, Mel, for joining us today. It sounds like there's more work that needs to be done in terms of sounding out why reviews are not so popular than audits and whether additional assistance is needed in conducting reviews or whether alternatives need to be explored, and as you say, this is a timely, to put thought to that as the ACNC legislation is reviewed later this year. So, thank you again. Thanks, Claire. Thanks for listening to the CPA Australia Podcast. To download the transcript and find more information on today's episode, visit