Revisiting Audits or Review of Accounts

I have always regarded legislation such as the Industrial and Provident Societies Act 1908, Agricultural and Pastoral Societies Act 1908, Building Societies Act 1965, Friendly Societies and Credit Unions Act 1982, and Racing Act 2003, and Acts specifically dealing with professions as minefields which are not readily covered in material intended for those running and advising more “mainstream” community societies and charitable trusts.  Indeed, to do so would tend to confuse the primary readership.  Therefore, this series of articles has tended to shy away from more esoteric societal legislation.

However, a reader kindly drew my attention to statutory issues relating to the audit of the industrial and provident societies, which prompts me to revisit the subject of the auditing or reviews of the accounts of not-for-profit organisations discussed in my 28 January 2011 article.

Industrial and Provident Societies Act 1908

This Act contains conflicting messages:

  • Section 7 provides that “With respect to the rules of societies the following provisions shall have effect: (a) The rules of every society sent for registry shall contain provisions in respect of the several matters mentioned in Schedule 2 hereto,” and item 7 of Schedule 2 states “Provision for the audit of accounts.”  Read with section 19, it would appear to me that the rules could provide for no audit.
  •  Section 19 provides for the “Appointment of auditors”:

 (1)    Any registered society may from time to time appoint an auditor or auditors of the society.

(1A) Whenever any registered society has no auditor the Registrar may, on the application of any member of the society, appoint an auditor of the society. The remuneration of an auditor appointed by the Registrar may be fixed by the Registrar.

(2)    No person shall be qualified for appointment under this section as auditor of a registered society unless he is a chartered accountant (within the meaning of section 19 of the New Zealand Institute of Chartered Accountants Act 1996).

(3)    Nothing in this section shall be construed to limit or affect in any way any provision in the rules of a registered society for the appointment, in accordance with those rules, of 2 or more persons as auditors of the society, and nothing in subsection (2) of this section shall apply to any person so appointed.

Section 19(1) says quite clearly “Any registered society may from time to time appoint an auditor or auditors of the society.”  That is clearly a discretionary decision for an industrial and provident society.

  • Section 8, dealing with the duties and obligations of societies, contains several references to auditing (bolded), with paragraphs (iii) and (iv) cross-referencing to section 19 (I have omitted more detail in the interests of saving space):

 …

(a)    Every society shall—

(iii)   If the society is not an issuer within the meaning of section 4 of the Financial Reporting Act 1993, once at least in every year submit its accounts for audit, either to an auditor or auditors appointed under section 19 of this Act or to 2 or more persons appointed as the rules of the society provide … :

(iv)    If the society is not an issuer within the meaning of section 4 of the Financial Reporting Act 1993, within 3 months after the date of the annual balance of the society’s accounts send to the Registrar a general statement (to be called the annual return) of the receipts and expenditure, funds, and effects of the society as audited, which shall show separately the expenditure in respect of the several objects of the society, and shall be made out to the date of the annual balance, and shall state whether the audit has been conducted by an auditor or auditors appointed under section 19 of this Act, and by whom, and, if by any person other than an auditor so appointed, shall state the name, address, and calling or profession of each such person, and the manner in which and the authority under which he is appointed, and together therewith shall send a copy of the auditor’s report:

(vi)    Supply gratuitously to every member or person interested in the funds of the society, … in the case of a society that is an issuer within the meaning of section 4 of the Financial Reporting Act 1993, a copy of the last financial statements of the society prepared under that Act and a copy of the auditor’s report on those statements:

(vii)   Keep a copy of the last statement of financial position for the time being, together with the report of the auditors or, in the case of a society that is an issuer within the meaning of section 4 of the Financial Reporting Act 1993, a copy of the last financial statements of the society prepared under that Act and a copy of the auditor’s report on those statements, always hung up in a conspicuous place at the registered office of the society:

  • Sections 19 and 8 of the Industrial and Provident Societies Act therefore appear to be in conflict, but the imperative provisions of section 8 probably take precedence over the discretion apparently contained in section 19.  The offence provisions in section 8 (not reproduced here) would certainly make any officer cautious about not auditing.

Agricultural and Pastoral Societies Act 1908

Section 12 sets out bylaws for agricultural and pastoral societies, subject to section 11 which allows for their amendment by the members.  The section 12 bylaws provide for the auditing of accounts by the members (under section 12(d) “two or more auditors” chosen “out of their ordinary members”), but societies can, clearly, remove the requirement for audits by amending their bylaws.

More recent legislation

 Section 98 of the Building Societies Act 1965, section 62 of the Friendly Societies and Credit Unions Act 1982 (with some exceptions), and section 13 of the Racing Act 2003 all require the appointment of auditors, with all those statutes containing various machinery provisions about auditing and audit reports.

What advice to give about audits or reviews of accounts

As pointed out in my 28 January 2011 article “… the Charities Commission does not require audits, and the Incorporated Societies Act, Charitable Trusts Act, and Charities Act do not require that accounts be audited or, even, looked after or prepared by a qualified person.”   However, more targeted legislation, as discussed above, makes specific provision for audits of particular types of societies.

Whether or not an audit or review of accounts is required, the suggestions made by me previously remain pertinent:

  1.  Ensure that a good accounting system is set up, if necessary after obtaining professional advice about the minimum requirements.
  2. The accounts must be controlled by an honest person with basic business skills.  A Police check of employees involved in financial management is a basic protective measure.
  3. Never, ever, adopt or condone the pre-signing of cheques – that is an invitation for misappropriation.
  4. If the entity justifies investing in an accounting system, look closely at what is available and whether investing in a computerised system would be worthwhile.  There are many basic accounting software programmes readily available, and the local newcomer, Xero, has a lot to offer larger entities.
  5. Adopt robust procedures to ensure that income is banked and that expenditure is justified, and get all accounts approved (not just rubber-stamped) at regular governance meetings.
  6. Consider very carefully what the constitution says, or, more importantly, should say about audits or reviews of annual accounts.
This is one of a series of articles on societies and charitable trusts (originally published in the NZ Lawyer magazine) by Mark von Dadelszen, a Hastings lawyer and author of Law of Societies, 3rd Edition, 2013. If any reader has examples of issues that have arisen or questions about societies or charitable trusts that might be a suitable subject for one of these articles please contact Mark at mark.vondadelszen@bvond.co.nz.