By Louise Hallsworth, Director, Education & Not-for-Profit, and Annie Lee, Associate Director, Charities Audit Lead
Charities and other not for profit organisations have a clear sense of purpose and rely on public trust, which is built through transparent reporting. As the updated Charity SORP 2026 becomes embedded in our work, boards and finance leads face an important distinction between reporting that is simply compliant and reporting that is genuinely decision‑useful. From governance and fund accounting to leases and social investments, the emphasis of audit is shifting, bringing with it a renewed opportunity to communicate value, impact and organisational resilience more clearly than ever.
The not-for-profit (or “third”) sector spans charities, social enterprises, co-operatives and mutuals, community organisations and socially focused businesses – all united by a public benefit objective rather than profit. Audit and accounting requirements in this sector are distinct from those in the public and private sectors. Income thresholds determine when accruals accounting applies and whether an Independent Examination (IE) or a statutory audit is required.
In England and Wales, a statutory audit is generally required when gross annual income exceeds £1m, or when income exceeds £250k AND total assets exceed £3.26m. An independent examination is required when gross income exceeds £25,000 and above £250,000 the independent examiner must be a member of an approved professional body. Thresholds are expected to rise by 50% after 30 September 2026 reflecting the compound inflation since the thresholds were set in 2015. This increase to £1.5m income or over £500k income AND gross assets of £5m for an audit will lead to approximately 2,000 charities no longer having to be audited reducing administrative burden and costs.
This change will reduce any audit impact of the new SORP lease accounting requirements which could possibly have drawn more charities into the audit scope. IE thresholds are also increasing to £40K estimated to remove 11,000 small charities from this requirement with a saving of £7.8million in fees. In addition, the need to use a person with a professional qualification has increased to £500K reducing the need for 9,000 charities saving £23m for the sector. (Separate rules apply in Scotland and Northern Ireland).
These changes reflect the government’s push for simplification in the sector reducing unnecessary administrative burdens which have limited benefit.
Charities will follow the Charities Act 2011, the Charities SORP and in some cases the Companies Act 2006. Governing documents may also impose additional audit or reporting requirements.
From our experience, the strongest boards treat audit as a valuable process rather than a compliance backstop. Three patterns consistently stand out.
First “surprises”. Growing charities often cross reporting thresholds mid-cycle without adapting systems early enough. Proactive readiness – such as drafting accruals policies, maintaining lease registers and mapping restricted funds – prevents avoidable year-end pressure.
Second, narrative gaps in the trustees’ report. Stakeholders increasingly want to understand impact, risk and stewardship, not just a list of activities. Clear linkage between objectives, activities, outcomes and reserves policy builds credibility and confidence.
Third, social investments, previously referred to as mixed-motive investments. While the intent is social, the accounting must reflect risk and return with clarity. Early classification decisions avoid rework and enable clearer explanations to funders and stakeholders.
What works in practice is a light-touch, materiality-driven planning conversation with your auditor, supported by early assessments of lease accounting and income recognition for grants and donations. Joined-up governance between finance teams and trustees is critical.
What does not work is treating SORP updates as a simple template refresh. These changes involve judgement – particularly where comparatives, systems and disclosures are affected – and they benefit from rehearsal before year-end.
This is not solely an audit issue. The implications extend across finance, governance and operational teams.
Tax and VAT considerations are affected by distinctions between grants and contracts, the use of trading subsidiaries, and the flow of Gift Aid. Governance arrangements, including internal controls, delegated authorities and conflicts management, have a direct impact on audit scope, cost and stakeholder confidence. Systems and data quality – such as fixed asset records, lease information and restricted funds tracking – underpin reliable reporting. From an advisory and funding perspective, reserves policies, going concern assessments and scenario planning are increasingly central to funder assurance and long-term sustainability.
Bringing these elements together transforms audit from an annual hurdle into a single source of truth for trustees, executives and funders, while reducing the total cost of assurance over time.
Charities SORP 2026, applicable for accounting periods beginning on or after 1 January 2026, aligns with changes in FRS 102 while remaining proportionate for the sector. Tiered reporting will reduce disclosure requirements for smaller charities, while updated lease accounting and income recognition will demand better data, clearer documentation and earlier judgements.
The re-framing of mixed-motive investments as social investments sharpens accountability around purpose, financial return and risk. Enhanced expectations for trustees’ reports reinforce the importance of clearly articulating outcomes, risks and reserves, not simply activities.
The next 12 to 18 months present a valuable planning window. Assess your position against current and forthcoming thresholds, consider the impact of SORP 2026 on leases, income recognition and social investments, and refresh the trustees’ report to tell a clearer story of purpose, performance and prudence. Review governing documents and delegated authorities to ensure they remain appropriate for your size and risk profile.
If you would value a practical discussion about your organisation’s readiness – or whether an Independent Examination or full audit is most appropriate – our team would be delighted to help. Please contact us to arrange a tailored session focused on thresholds, SORP 2026 impacts and governance narrative.
