Our letter to the Scottish government on the new Charities Act and charity law reform

Dear Cabinet Secretary,

Charity law reform

We very much welcome the reforms to Scottish charity law under the Charities (Regulation and Administration) (Scotland) Act 2023. We also welcome the Scottish government’s commitment to undertake a wider review of Scottish charity law in recognition that this Act is largely focused on updating the powers of the Office of the Scottish Charity Regulator.

We believe that additional post legislative scrutiny of the Charities and Trustee Investment (Scotland) Act 2005 is necessary, given the relatively limited scope of the review which led to the 2023 Act, and the absence of a wider review since the 2005 Act comprehensively reformed Scottish charity law and regulation.

We understand that while there are no plans to introduce another charities bill until the next parliamentary term, the Scottish government is committed to commencing the wider review during this term. We urge you to begin scoping the wider review without delay and would welcome the opportunity to work with you and your team to assist this scoping exercise.

We have concerns about the sustainability of the external scrutiny regime for charity financial statements currently in place for Scottish charities, and have also identified technical changes we believe are necessary to improve the Charities Accounts (Scotland) Regulations 2006. We believe that changes to the external scrutiny regime are likely to be achievable without changes to primary legislation and that the majority of technical changes needed to the 2006 Regulations could be achieved while remaining consistent with the related provisions of the 2005 Act.

We highlighted our concerns about auditor availability and set out in detail our proposals for technical changes to the 2006 Regulations in our written evidence to the Scottish Parliament’s Social Justice and Social Security Committee as part of its scrutiny of the recent Bill. We also highlighted our concerns about auditor availability in the informal oral evidence we gave to the committee.

Increases to the company law audit threshold over an extended period have led to a fall in the number of accountancy firms being registered to undertake audit work. This continuing trend impacts on the availability of auditors to undertake audit work, including charity audits. Scottish charities have a significantly lower audit threshold than companies. For example, a company needs to have a turnover of more than £10.2 million in a financial year before an audit is required, but a Scottish charity only needs to have a gross income of £500,000 or more. The differential between the two thresholds adds to the challenges charities face in securing the services of an auditor.

While the last significant uplift in the company law audit threshold took place in 2016, developments such as changes to the regulatory environment for auditors and their clients, including more extensive auditing standards, have led to an increase in demand for audit skills in a tight labour market and an upward pressure on audit fees. This means that there is an increasing risk that some Scottish charities may not be able to secure the services of an auditor for their statutory audit.

To mitigate this risk, we believe that the Scottish government should review the charity law audit threshold, with a view to raising it as a matter of urgency. In doing so, we believe that it will be necessary to strengthen the independent examination regime for Scottish charities by being more prescriptive about the work an independent examiner should undertake. There would be merit in considering a similar approach to that taken in England and Wales, whereby charity independent examiners must comply with formal directions issued by the Charity Commission for England and Wales.

Ultimately, we believe that if a significant number of charities are unable to file audited, financial statements where these are required, this will have a negative impact on public trust in the sector. Our more immediate concern is the impact on charities and the trustees of those charities who find themselves unable to meet their filing obligations under the 2005 Act and 2006 Regulations.

If you or your team would like to discuss these points with us in more detail, we would be very happy to meet you.

Yours sincerely,

J Bruce Cartwright, ICAS Chief Executive