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Registered Charities - MED discussion paper released outlining proposed future audit and assurance requirements

In response to dissatisfaction expressed from the Charities Commission in relation to the quality and consistency of financial reporting from New Zealand’s 25,000+ registered charities, the MED has issued its proposed Audit and Assurance framework for registered charities.

Under the proposals registered charities with annual operating expenditure greater than $200k will require an assurance engagement to be conducted on their general purpose financial statements (GPFS) prepared under New Zealand Generally Accepted Accounting Practice (NZ GAAP).

For a significant number of registered charities this will be a first in terms of GPFS preparation and assurance requirements.

What is this all about, what is the MED’s rationale for this change?

In the words of the Minister of Finance (Hon Craig Foss):

“A major aim of charity regulation is to promote public confidence and trust in fundraising, thereby increasing the public’s willingness to donate.”

To date, the only requirement imposed on Registered Charities to retain their registered status, and the associated tax benefits of this registration, was to attach “financial statements” to its annual return to Charities Commission.

These financial statements:

  • Currently have no prescribed financial reporting framework (i.e. they do not have to conform to NZ GAAP); and
  • Currently have no prescribed assurance requirement.

While some Registered Charities do submit audited GPFR compliant with NZ GAAP as a result of constitution requirements; funder covenants (i.e. banks); or simply as a form of best practice corporate governance, the vast majority do not. In contrast, at the lower end of the scale, the Charities Commission is currently receiving “financial statements” in the form of: bank statements; hand written cash books; loose receipts and invoices; or worse.

This is consistent with recent studies that have revealed the quality of financial reporting by registered charities is low, and incorporates non-compliant NZ GAAP practices that aim to manipulate a charity’s top and bottom line to make it look “poorer” than it really is, so that it can more easily attract future funding.

With this in mind, both the Charities Commission and MED have deemed the current status quo to be unacceptable, and change must be implemented to promote public confidence in registered charities and thus increase the public’s willingness to donate to these entities.

So what is the MED proposing?

In essence the MED is proposing that for the largest registered charities, the “financial statements” that must be submitted as part of their annual return, must:

  • Confirm with NZ GAAP; and
  • Be subject to an assurance engagement (depending on their “size”)

“Size” is to be measured on the basis of a registered charity’s “operating expenditure”.

A summary of the proposals is shown in the table below:

Operating Expenditure Assurance Engagement Required
Less than $200,000 No Assurance Engagement required
Between $200,000 - $300,000 Review or Audit Assurance Engagement
Greater than $300,000 Audit Assurance Engagement

Review vs. Audit, what is the difference?

Paragraphs 22 and 23 of the MED’s Discussion Paper address the differences between a “Review” and “Audit” engagement. In summary:

  • A review engagement has a limited scope of work to be conducted, that results in “limited assurance” and a “negative opinion”, stating that nothing has come to the auditor’s attention that financial information does not present a true and fair view in accordance with NZ GAAP.
  • An audit engagement requires a wider scope of work to be conducted, that results in “reasonable assurance” and a “positive opinion”, stating that financial statements as a whole are free from material misstatement, whether due to fraud or error. As a result, the cost of an audit is higher than that of a review.

How many Registered Charities are going to be impacted?

The above proposed thresholds are estimate to capture the largest 20% of registered charities.

The biggest impact is going to be felt by those registered charities that sit above these proposed thresholds and are not currently preparing financial statements in accordance with NZ GAAP, and having them audited (or reviewed).

It should be remembered that the above thresholds only set the proposed legal benchmark for the preparation and audit (or review) of NZ GAAP compliant financial statements. Many registered charities may already have these requirements embedded in other forms, such as:

  • Part of their constitution or founding documents; and/or
  • Part of their agreements with external funders (i.e. banking covenants).


As mentioned above, the biggest impact will be for those registered charities that will potentially be caught by the proposal, that are not currently preparing NZ GAAP compliant financial statements and having them reviewed or audited.

These registered charities will need to begin planning their transitions into both NZ GAAP compliant reporting, and an assurance engagement; earlier rather than later so as to avoid potential complexities moving to NZ GAAP and potential qualifications on the opening balances.

The deadline for submissions to the MED in response to the Discussion Paper is 20 July 2012.

The Discussion Paper can be accessed from the MED’s website

For further information on the above, please contact your local BDO representative.

For PDF version of Assurance Alert click here