The NDA Nightmare

As part of Mercia’s Technical Query Service, we’re currently seeing lots of queries on dealing with non-disclosure agreements (NDAs) when auditing charities.

In this blog we’ll take a look at the key issues.

What’s happening?

It’s becoming increasingly common for NDAs to be singed as part of severance arrangements for staff within charities, effectively prohibiting the charity from disclosing details of the settlement.

What’s the issue?

When it comes to preparing the accounts, FRS 102 requires an entity to disclose “…for each category of termination benefit… the nature of the benefit, its accounting policy, and the amount of its obligation and the extent of funding at the reporting date.”

The Charities SORP requires disclosure of “… for any redundancy or termination payments relating to the reporting period… the total amount for the reporting period, the nature of the payment, its accounting policy, and the extent of funding at the reporting (balance sheet) date”.  The Charities SORP also requires disclosure of ex-gratia payments.

Whilst neither FRS 102 itself, or the Charities SORP, ordinarily require the party receiving the termination payment to be named (except, for example, in the case of a remunerated trustee), it’s often relatively obvious to users of the financial statements who the beneficiary of such a payment is. This presents an issue as meeting the disclosure requirements of the applicable reporting framework may contravene the terms of a NDA which has been singed.

There is of course no exemption from this disclosure requirement in FRS 102 or the Charities SORP – after all, every entity would be signing NDAs to avoid the disclosure requirement if they could! Non-disclosure of termination payments is therefore non-compliance with FRS 102 and the Charities SORP.

Impact on the auditor’s report

Technically speaking, where a charity does not disclose the details of termination payments due to the presence of a NDA, if the impact is material (and it often is material by nature even if not amount), the auditor will need to qualify the auditor’s report in line with ISA (UK) 705.  

It’s worth noting that in the case of non-disclosure of information required to be disclosed in the financial statements, ISA (UK) 705 paragraph 23 effectively requires the auditor to disclose that information and include the omitted disclosures within the auditor’s report.

There is an exemption where the auditor is prohibited from disclosing this information by law or regulation – this can rarely be relied upon though, as the auditor would not be a party to the NDA in the first place, so is unlikely to be prohibited from disclosing this information!

Our advice

In an ideal world trustees should not be signing NDAs which could cause issues for compliance when preparing their accounts.

If they do, they should be seeking legal advice on their position, as otherwise they risk knowingly approving accounts which fail to comply with the reporting framework, receiving a qualified auditor’s report, and the information being disclosed by the auditor anyway.

Final thoughts

Perhaps unsurprisingly, auditors of charities are rarely consulted prior to trustees signing NDAs and landing themselves in these difficult situations. It’s nevertheless worth auditors proactively having conversations with trustees to remind them to consider the implications for the accounts and the auditor’s report when reviewing such agreements – this can help avoid the damage to the auditor-client relationship that would inevitably arise from a need to qualify the opinion.