Audit of TSOs financial statements

By reforming the third sector and introducing the Code of the Third Sector, the Italian legislator has reviewed and gathered different business and non-business entities, which were previously regulated under different accounting and tax rules.

The reform of the third sector introduced a number of obligations, including the appointment of a supervisory board (similar to the Board of Statutory Auditors in case of business entities) and the appointment of an external auditor, when certain limits are exceeded.

In the Code of the third sector, the financial statements audit is specifically regulated under art. 31, whose para. 1 establishes that recognised or non-recognised associations and foundations of the third sector must appoint an external auditor or audit company registered with the proper roll if they exceed two of the following limits for two consecutive fiscal years:

• Assets higher than 1.100.000 Euro;
• Revenues, rentals, income, proceeds however called: 2.200.000 Euro;
• Average number of employees per year higher than 12.

TSOs must appoint a supervisory board when they exceed two of the following limits for two consecutive fiscal years:

• Assets higher than 110.000 Euro;
• Revenues, rentals, income, proceeds however called: 220.000 Euro;
• Average number of employees per year higher than 5.

A further update introduced by the reform concerns the preparation of the financial statements, the relevant set of forms to provide and their filing with the national unique register of the third sector.

Article 13 of the Code of the third sector provides that third sector organizations must prepare their financial statements made up by the balance sheet, the income statement and the report to the financial statements indicating financial statements items, the economic and management performance of the organization and how the organization’s aim is being pursued. Organizations whose revenues, rentals, income, proceeds however called are lower than 220.000 Euro can prepare their financial statements on a cash flow basis.

TSOs’ financial statements must therefore be prepared in compliance with the set of documents defined by the decree of the Minister of labour and social policies dated 5 March 2020, which introduced specific reporting schemes and a mandatory minimum reporting requirement.

The above Ministerial Decree dated 5 March 2020, besides adopting financial statements schemes, also clarifies some aspects regarding audit that are not specified in the Code of the third sector: the auditor’s report is issued pursuant to art. 14 of legislative decree no. 39/2010 and therefore, the audit standards to be adopted are Italian ISA; audit is carried out on the balance sheet, the income statement and the report to the financial statements; the auditor’s report also includes an opinion on the consistency of the financial statements with the relevant report section explaining the economic and financial performance of the organization and how the organization’s aim is being pursued, as well as on the compliance of the same report’s section with the law provisions and the statement on significant errors.

Moreover, in February 2022, the Italian accounting standard setter (OIC) issued OIC accounting standard no. 35, aimed to regulate the criteria for the representation of the balance sheet, of the income statement and of the report to the financial statements of TSOs, with particular reference to their structure and content, as well as the criteria for the identification and evaluation of some typical cases of TSOs.

In this changing moment, the legislator also provided the necessary clarifications concerning the filing of the financial statements by TSOs (note no. 17146 dated 15 November 2022 issued by the Ministry of labour). Specifically, TSOs incorporated before 2022 and registered with the national register of the third sector in 2022 must file the financial statements of the previous FY (2021) with the register, after approval of the registration request.

Specifically, it has been clarified that those entities considered as temporary TSOs (voluntary work organizations, social promotion associations, NPOs) must comply with Ministerial Decree no. 39/2020 starting from the financial statements relevant to FY 2021, which must be filed with the register within 90 days after the registration, according to circular letter no. 9/2022, through the Register electronic channel (note no. 5941 dated 5 April 2022).

On the other hand, with reference to entities that are subject to the transparency obligations under the Code of the third sector only after their registration with the National register of the third sector (and, subsequently, after qualifying as TSOs), an obligation to file the financial statements (and their subsequent publication) would imply a retroactive value of such provision, thus lacking a proper regulatory coverage. Therefore, a voluntary filing remains admissible for such organizations.

On the one hand, such updates rest on TSOs’ administration structure, as they need to adopt precise and analytic accounting systems needed for the preparation and filing of the financial statements according to the new rules; on the other hand, the existence of a set of rules and technical instructions allow stakeholders to evaluate the effective use of financial resources by organizations in social interest activities and makes it easier for financing bodies to evaluate, analyse, and compare different TSOs.

In such a context, the role of the auditor and of the supervisory board must be considered not only as a “control” function, but also as an opportunity to express and strengthen the economic and financial situation of TSOs, as well as their performance, in terms of transparency and responsibility.