Non-profit organisations (NPO) play a crucial role in helping communities, supporting those in need, and offering essential services in Singapore. Since they manage public donations, government grants, and other funds, they must ensure they are using these resources responsibly. One key way to ensure this is through regular audits. Audits independently review a charity's financial statements to make sure that funds are being spent appropriately and align with the charity’s goals.

In this guide, we’ll look at why charity audits are important in Singapore, the legal requirements for them, how the audit process works, and how they help ensure transparency and accountability in the charity sector.

Why Audits Are Important for NPOs

Audits are important for ensuring that NPOs handle their finances with transparency and honesty. Since NPOs rely on donations and grants, donors and the public expect their money to be used properly for charitable causes. To keep this trust, NPOs need to show they are managing their funds well, and audits are the best way to prove this.

Here’s why regular audits are essential for NPOs:

• Transparency:
  Audits independently check how the charity spends its funds. This transparency reassures donors, recipients, and regulators that the charity is using money ethically and for its intended purpose.
  
• Accountability:
  Audits make sure NPOs are managing their finances properly. They ensure funds are used correctly and help spot any mistakes or misuse of resources.
  
• Donor Confidence:
  Donors, especially large contributors and corporate sponsors, are more likely to support NPOs with audited financial statements. This shows the charity is serious about handling funds responsibly.
  
• Fraud Prevention:
  Audits help find any financial problems or potential fraud. NPOs are at higher risk of fraud because they rely on donations and volunteers, so regular audits are important to prevent this.

Regulatory Requirements for NPOs Audits in Singapore

In Singapore, NPOs overseen by the Commissioner of Charities (COC) and must follow the rules set out in the Charities Act. This law provides the guidelines for how NPOs should operate, including their responsibilities for governance, accounting, and reporting. One of these responsibilities is to have an audit, though the specifics depend on the charity’s size and income.

Here’s what NPOs in Singapore need to know about audits:

• Society:
  A society is an entity registered under the Societies Act for purposes such as social, cultural, or recreational activities. Governed by the Registry of Societies (ROS) under the Ministry of Home Affairs, it is owned by its members, who are personally liable for debts if the society winds up. While subject to standard corporate tax unless exempted by IRAS, societies benefit from simple compliance requirements, including annual returns to ROS. Activities are restricted to stated objectives, and public fundraising requires approval under Charitable Fundraising Regulations. Common examples include clubs, associations, and professional bodies.
  
• CLG:
  A Company Limited by Guarantee (CLG) is registered under the Companies Act to support non-profit objectives. It operates under the oversight of the Accounting and Corporate Regulatory Authority (ACRA) and, if registered as a charity, the Commissioner of Charities. CLGs have no shareholders, only members, whose liability is limited to their guarantees. They are subject to corporate tax unless registered as a charity and must submit annual returns to ACRA, complying with Companies Act requirements, including financial reporting. While offering limited liability and formal governance, CLGs face higher compliance costs and stricter governance standards compared to societies.
  
• Charity:
  A Charity is registered as a Society or CLG under the Charities Act to support charitable purposes. It operates under the Commissioner of Charities, with tax-exempt status on income and donations. Charities must submit annual returns to both ACRA and the Commissioner of Charities and comply with the Charities Act, as well as the Societies or Companies Act, depending on their structure. They are restricted to charitable purposes, must adhere to Charitable Fund-raising Regulations, and are eligible for grants and tax exemptions.

• Institutions of a Public Character (IPCs):
  Charities with IPC status, which allows them to issue tax-deductible receipts for donations, must submit audited financial statements every year, no matter their size. If NPOs don’t follow these rules, they could face penalties, including fines, suspension of their charity status, and harm to their reputation.

The Audit Process for NPOs

The audit process for a charity is similar to that of a for-profit organization, but with some special considerations for NPOs. Here’s a simple breakdown of the steps involved in a charity audit:

• Preparation and Planning
  Before the audit starts, the charity’s team needs to gather important financial documents, such as income statements, balance sheets, and cash flow statements. Auditors will also want to review records of donations, grants, and other income, along with how these funds were spent.
  
  In the planning stage, auditors will meet with the charity’s team to understand how the charity handles its finances, identify any potential risks, and discuss the scope of the audit. They will also agree on the timeline for the audit and what the final audit report should include.
  
• Conducting the Audit
  During the audit, the auditors will review the charity’s financial records in detail. This includes checking if the financial statements are accurate, if they follow the correct accounting rules, and if funds are being used properly for the charity’s mission.
  
  The auditors may also talk to key staff to understand how the charity operates and review the charity’s internal processes to ensure everything is managed correctly.
  
  One important area the auditors will focus on is how donations are managed. They’ll make sure donations are recorded properly and that any restrictions on donations (like money for a specific project) are being followed.
  
• Reporting and Recommendations
  At the end of the audit, the auditors will write a report with their findings. The report will include their opinion on whether the charity’s financial statements give a true and fair picture of the charity’s finances and if they follow the correct accounting standards.
  
  If the auditors find any issues, they will suggest ways the charity can fix them. These recommendations might include improving internal controls, updating how financial reports are done, or taking steps to avoid problems in the future.
  
  The audit report is then shared with the charity’s board of directors, the Commissioner of Charities, and any other important stakeholders like donors or grant providers.

Benefits of Regular Audits for NPOs

Regular audits provide many advantages for NPOs, beyond just meeting legal requirements. These benefits include:

• Better Financial Management:
  Audits help NPO find areas where they can improve how they manage money and resources. By following the advice from auditors, NPO can strengthen their financial health and long-term success.
  
• Risk Management:
  Audits help NPO spot potential risks, like fraud, poor financial handling, or not following regulations. Addressing these risks early helps prevent bigger problems later.
  
• Stronger Governance:
  A good audit process promotes better management within the charity. When board members have access to regular audit reports, they are more involved in financial decisions, leading to better overall decision-making.
  
• Increased Credibility:
  NPO that regularly audit and share their financial reports are more likely to gain the trust of donors and partners. This openness boosts the charity’s reputation and credibility in the nonprofit world.

Common Challenges and How to Overcome Them

While audits are important for NPO, they can come with challenges, especially for smaller organizations with limited resources. Here are some common challenges and ways to overcome them:

• Cost of Audits:
  Hiring an independent auditor can be costly, particularly for NPO. To manage this, NPO can look for free audit services from accounting firms or apply for government grants or funding that help cover audit costs.
  
• Time-Consuming Process:
  Preparing for an audit takes time and effort, which can take focus away from other important activities. To reduce this impact, NPO can set up strong financial systems and keep accurate records throughout the year, making it easier to provide the needed documents during the audit.
  
• Lack of Expertise:
  Some NPO may not have the financial knowledge required for the audit process. To solve this, NPO can invest in training for their staff or hire experienced financial professionals to handle the charity’s finances.

Conclusion

At Clooud Consulting, we understand the importance of audits for NPO in Singapore. Regular audits help ensure compliance, accountability, and transparency, which are vital for the nonprofit sector. Audits allow NPO to manage their funds properly, meet legal requirements, and gain trust from donors and other stakeholders. By understanding the audit process, NPO can improve their financial management, strengthen operations, and ensure long-term success.In an industry that relies on public trust, audits are more than just a legal requirement—they are essential for maintaining credibility and ensuring NPO can continue making a positive difference in society. Please, contact Clooud Consulting if you need support in NPO audit.