Q: We are a large complex charity (with an income over £15 million) and are considering appointing internal auditors. What would we gain from appointing them, at what point do we need to do it, and how do we choose them?
A: Firstly you need to consider why internal controls are important. A good starting point is the Charity Commission guidance Internal Financial Controls for Charities (CC8). This explains that a good internal control environment is crucial for trustees to be able to discharge their trustees' responsibilities in relation to:
• Keeping adequate accounting records that are sufficient to show and explain the charity's transactions
• Disclose with reasonable accuracy the financial position of the charity
• Ensure compliance with laws and regulations
• Safeguard the assets of the charity
• Manage the risks of the charity
The internal control environment is based on balancing the performance of an organisation with ensuring things are done properly and are appropriately reviewed ("accountability"). This helps to ensure the organisation operates with probity and prevents fraud and abuse of its assets. A smaller organisation may be able to achieve this easily as the trustees may be able to review every transaction. This accountability to the trustees will become more difficult as the organisation becomes bigger and more complex.
An internal audit forms part of the internal control arrangements of the charity, where it is used, and can either be fulfilled using staff employed by the charity or outsourced to another organisation to deliver this service. The most important aspect is that of the reporting lines – which are either directly to an audit committee or to the board of trustees. The internal audit function needs to be independent of the management of the charity. Its role is far wider than purely financial controls and usually will encompass strategy, corporate governance, operational risk management as well as reputational risks. The internal auditor will also look at and assess the efficiency and effectiveness of the organisation in the areas subject to its scrutiny and therefore can enhance productivity.
An internal audit can give the trustees assurance on the effective management of risk in the charity, which underpins good corporate governance. Additional benefits could include a review of the effectiveness of the control environment, leading to improvement of the competence and performance of the charity, identification of weaknesses, advice on best practice processes and procedures and independence.
The decision about the appointment of internal auditors is one that flows from the board of trustees and, as noted above, relates to corporate governance. Where organisations have become more complex, have grown in size or diversity, more consideration must be given to whether it is the right time to implement an internal audit function. It is usually the same reason why the board of trustees may choose to create an audit committee to be able to help the trustees with risk management and effective and efficient internal controls and review of governance procedures. This decision can be taken by the board of trustees at any time, and once the decision has been made then the charity needs to go about selecting an internal auditor.
Selecting internal auditors
Preparation
Firstly you must understand the role that the internal audit is to play so that you will be able to appoint, either internally or externally, the right individuals to assist your organisation. I will focus on outsourcing the internal audit process, as this is the common approach.
The first stage is to consider the areas that internal audit will focus on – primarily driven by your risk register – in a rolling programme over a three or four year horizon. Such an outline plan will assist the internal auditors to understand their role and time input required.
Initial approach
The next step is to approach a number of providers of internal audit services to submit tender documents. At this stage it is important to establish the credentials, competence and experience of those firms that you approach. This can be achieved through asking for recommendations from colleagues and/or selecting providers that appear to be appropriately experienced and qualified. It is important to ask the selected firms for references, which should be taken up before appointment. Larger accountancy practices, like Chantrey Vellacott DFK, offer internal audit services.
Tender process and selection
The approached firms will normally visit you before submitting their tender document. This gives you an opportunity to gain an understanding of their professionalism, experience in your particular sector, personality and working relationships. The tender document itself as a minimum should summarise their credentials, the team, their qualifications and the firm's resources, internal audit approach and methodology, their understanding of your business environment, fees and references.
Remember, although price is important, these advisors will be a crucial part of your corporate governance and will be advising you on your business environment, suggesting changes, making recommendations and offering you advice on best practice. You need to be confident that they will provide you with an effective, independent service with the knowledge, resources and technology to support you. The short-listed firms are often required to present to a selection panel delegated to make the appointment.
Review
Finally, once appointed, the relationship needs to be managed by both parties. Therefore, if you feel that there are performance issues, these need to be addressed straight away. An ineffective internal audit function will quickly become a burden and a hindrance. Do not feel that you cannot challenge the firm where quality is an issue.
Helena Wilkinson is a partner at accountancy firm Chantrey Vellacott DFK LLP specialising in the audit of charities and not-for-profit organisations. She is also a committee member of the Institute of Chartered Accountants in England and Wales (ICAEW) Charity and Voluntary Sector Special Interest Group
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