Are you a small charity or incorporated society paying too much in accounting fees?

I recently met with a small incorporated society that was paying more than $4,000 per year for their annual financial statements. The reports prepared used the Tier 3 reporting framework for Not-for-Profits (NFPs). The organisation also engaged its accountant for a “review” (similar to, but different from, an audit) to give confidence to its members but were wondering if it was really required. The organisation was looking for ways to reduce costs and felt that reducing their accounting fees was one place to start. 

Unfortunately, the environment is tough out there right now for these small organisations. Expenses and compliance costs are rising and funding is even harder to get than in previous years. Many small NFPs will be looking for ways they can cut costs. 

Tier 3 vs Tier 4 reporting framework

I looked at the financial statements for this organisation for the previous two years and could see that the organisation had operating payments of less than $140,000 per year. This means that the organisation could use the Tier 4 reporting framework, instead of Tier 3.

The requirements for reporting under Tier 4 are less arduous, which means the accounting fees are likely to be lower than under Tier 3. Tier 4 reporting is prepared on a cash basis, so it is based mainly on the money that has gone in and out of the organisation’s bank accounts during the year. There is no balance sheet and fewer year-end accounting adjustments and notes are required.

This can make quite a difference for a small organisation. Under Tier 3, the accountant may need to identify unpaid bills, amounts owing to the organisation, funding received for future periods and other adjustments required to prepare accrual-based accounts. Under Tier 4, much of this work is not required.

More about Tier 3 financial statements

Tier 4 requirements

Tier 4 reports are still more than just a summary of the bank account. They include information about the organisation, a Statement of Service Performance showing what it has done during the year, a statement of cash received and paid, and notes about certain assets, liabilities and other matters. However, they do not include a full balance sheet showing all debtors, creditors and other year-end balances. Information about significant grants or donations received for use in future years can also be included, but this disclosure is optional.

For a small organisation with straightforward activities, Tier 4 can meet its reporting obligations while being easier for its committee or trustees to understand and less expensive to prepare.

Tier 4 disadvantages

Not all entities that qualify for Tier 4 will prefer it, however. Because the reports are on a cash basis, they may portray an entity’s performance in a way that doesn’t reflect reality. For example, if funding intended to last the whole year was received just before balance date, it could make the organisation look like it is running a significant surplus. Under Tier 3, this income would be recorded as deferred revenue, reducing the surplus on the Statement of Financial Performance and more accurately reflecting the performance of the organisation.

Auditing or reviews

An audit and a review are both formal assurance engagements that must be completed by an appropriately qualified auditor in accordance with professional standards. An audit is more detailed than a review and provides a higher level of assurance. Although not as detailed, a review is still an activity that has been defined by the External Reporting Board. It does not mean that your accountant friend can simply have a look over the reports and call it a review. Where an audit or review is required by law, it must be completed by a qualified auditor.

Audits are particularly onerous for small organisations, there is lots of paperwork shuffled back and forth between (often) a volunteer and the auditor. They are also significantly expensive. We have noticed with the rise of AI that auditors are asking for more detailed analysis and explanations than ever before which only adds to the compliance burden and cost.

When auditing and reviews are not required

Registered charities with operating expenditure under $550,000 per year in each of the last two years are not legally required to have an audit or review. Either an audit or review is required for charities with operating expenditure over $550,000 and an audit is required for those with operating expenditure of over $1.1m in each of the last two years.

For incorporated societies that are not charities, an audit is only required if its operating expenditure (combined with that of any entities it controls) was $3m or more in each of the previous two years. Small societies are usually not legally required to have an audit.

Some NFPs, however, may be required under their own set of rules or other governing documents to have an audit or review. Certain funders may also require an audit or review as a condition of the funding. Before you go ahead and change the constitution or trust deed that governs your organisation, just check that it won’t impact your funding or lending agreements.

The cheapest option won’t be right for every organisation. However, it is worth checking that the level of financial reporting and assurance you are paying for is still appropriate for the size and needs of your organisation. 

Here at The Accounting Hub, we help lots of charities and incorporated societies – both big and small. Feel free to get in touch to see if we can help with yours.