2011 Article, updated February 2018
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 are seldom considered other than by those who have a particular interest in such entities, and are 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 most people who read these articles. Therefore, this series of articles has tended to shy away from more esoteric societal legislation.
However, in late 2011 a reader kindly drew my attention to statutory issues relating to the audit of the industrial and provident societies, which prompted me to revisit the subject of the auditing or reviews of the accounts of not-for-profit organisations discussed in my article, Audits or Reviews of Accounts.
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,” 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 a quaified auditor of the society.
(1A) Whenever any registered society has no auditor the Registrar may, on the application of any member of the society, appoint a qualified auditor of the society. The remuneration of an auditor appointed by the Registrar may be fixed by the Registrar.
Section 19(1) says quite clearly “Any registered society may from time to time appoint a qualified auditor of the society.” That is clearly a discretionary decision for an industrial and provident society. Sections 8A – 8M deal with the duties and obligations of societies relating to accounting records, and contain several references to auditing (I have omitted more detail in the interests of saving space):
8A Accounting records must be kept
(1) Every registered society must ensure that there are kept at all times accounting records that—
(a) correctly record the transactions of the society; and
(b) will enable the society to ensure that the financial statements of the society comply with generally accepted accounting practice (if the society is required to prepare those statements); and
(c) will enable the financial statements of the society to be readily and properly audited (if those statements are required to be audited).
(2) Every registered society must establish and maintain a satisfactory system of control of its accounting records.
(3) The accounting records must be kept—
(a) in written form in English; or
(b) in a form or manner in which they are easily accessible and convertible into written form in English.
8C Interpretation for financial reporting provisions
(1) In sections 8A to 8M, accounting period, applicable auditing and assurance standard, and applicable financial reporting standard have the same meanings as in section 5 of the Financial Reporting Act 2013.
(2) In sections 8A to 8M and 19,—
balance date has the same meaning as in section 41 of the Financial Reporting Act 2013
financial statements has the same meaning as in section 6 of the Financial Reporting Act 2013
generally accepted accounting practice has the same meaning as in section 8 of the Financial Reporting Act 2013
large registered society means a registered society that is large under section 45 of the Financial Reporting Act 2013
qualified auditor has the same meaning as in section 35 of the Financial Reporting Act 2013.
8E Financial statements must be audited
(1) This section applies to every registered society unless the society has opted out of compliance with this section in accordance with section 8K or 8L.
(2) Every registered society to which this section applies must ensure that the financial statements of the society prepared under section 8D (if any) are audited by a qualified auditor.
(3) See sections 37 to 39 of the Financial Reporting Act 2013 (which provide for the appointment of a partnership and access to information in relation to a registered society).
8F Audit must be carried out in accordance with auditing and assurance standards
(1) An auditor must, in carrying out an audit for the purposes of section 8E, comply with all applicable auditing and assurance standards.
(2) The auditor’s report must comply with the requirements of all applicable auditing and assurance standards.
8G Financial statements must be sent to members
(1) Every registered society that is required to prepare financial statements under section 8D must ensure that, within 4 months after the balance date of the society, copies of those statements are sent to every member of the society.
(2) If the financial statements are required to be audited, the statements sent under subsection (1) must be accompanied by a copy of the auditor’s report on those statements.
8K Societies (other than large societies) may opt out of preparation and audit requirements
(1) This section applies to a registered society other than—
(a) a large registered society; or
(b) a society whose rules expressly provide that this section does not apply.
(2) The members of a registered society may, at a meeting held within 6 months from the start of an accounting period, opt out of compliance with either or both of the following provisions in relation to that accounting period by way of a resolution passed under section 8M:
(a) section 8D (preparation of financial statements):
(b) section 8E (audit requirement).
8L Large societies may opt out of audit requirements
(1) This section applies to a large registered society other than a society whose rules expressly provide that this section does not apply.
(2) The members of a registered society may, at a meeting held within 6 months from the start of an accounting period, opt out of compliance with section 8E (audit requirement) in relation to that accounting period by way of a resolution passed under section 8M.
8M Resolution to opt out
(1) For the purposes of sections 8K and 8L, the resolution must be passed at a meeting by not less than 95% of the members of the society for the time being entitled under the rules to vote that are present in person or by proxy (where the rules allow proxies) at the meeting.
(2) Notice of the meeting, specifying the intention to propose the resolution, must be duly given in accordance with the rules of the society.
(3) If the members opt out of compliance with a provision in relation to an accounting period under section 8K or 8L, the provision does not apply to the registered society in relation to that period.
- 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:
- Ensure that a good accounting system is set up, if necessary after obtaining professional advice about the minimum requirements.
- 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.
- Never, ever, adopt or condone the pre-signing of cheques – that is an invitation for misappropriation.
- 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.
- 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.
- Consider very carefully what the constitution says, or, more importantly, should say about audits or reviews of annual accounts.