The assets of Thiruvananthapuram’s Padmanabhaswamy Temple are estimated to be about Rs 1.2 lakh crore, which is nearly 24 per cent of the country’s net direct tax collection during 2011-12, making it one of the wealthiest temples in India. Another wealthy Indian temple is the Tirumala Tirupati Devasthanam, with an estimated Rs 35,000 crore assets. There are many such charitable and religious trusts in India with assets and collections running into thousands of crores of rupees.
Public trust transactions constitute a significant share of the country’s overall economic transactions and, thus, their wealth management is vital for the nation. Let us contrast the financial reporting requirements for such trusts with those for any listed company.
Two legislations govern the functioning of trusts — The Indian Trusts Act of 1882, a Central legislation covering private trusts; and State-level acts such as the Bombay Public Trust Act, 1950 to manage public trusts.
Financial Reporting and Audit
The State-level acts have elaborate requirements for maintenance of accounts and audit. Chapter V of the Bombay Public Trusts Act, 1950, for instance, deals with the budget, accounts and audit. Section 32, in particular, prescribes provisions for maintenance of accounts. The Act, however, does not prescribe any specific GAAP/ financial reporting framework.
The accounts should be audited annually either by a chartered accountant, or others not interested in, or connected with the public trust.
Interestingly, Section 34 specifies the auditors’ duty to prepare the balance sheet and the income-and-expenditure account, besides reporting irregularities. This provision compromises the independence of the auditors and may create a “self-review” threat. Perhaps the legislative intent is that the auditors should ensure the financial statements are prepared annually.
The financial statements and the auditors’ report should be sent to the Charity Commissioner’s office. The trustee of the public trust should also file a copy of the audited financial statements at the Charity Commissioner’s office.
Who is the addressee of the audit report? In the case of corporate entities, the reports are generally addressed to the corporate members. There is no specific requirement in the case of public trusts. Though the public at large can be treated as the stakeholders, currently there is no requirement to make the reports available in the public domain.
Under Section 12A(b) of the Income-tax Act, 1961, the format of the audit report (Form 10 B) for charitable or religious trusts or institutions does not specify the addressee and is generally directed “to whomsoever it may concern”
Rule 19 of the Bombay Public Trusts Act specifies that the auditor should report on aspects such as proper maintenance of accounts, correct accounting of receipts and disbursements, agreement of the cash balance with the accounts, appropriateness of the register of moveable or immovable properties, whether any property or funds of the trust were applied for any purpose other than that of the trust, the outstandings for more than one year and the amounts written off, whether tenders were invited for repairs or construction costing above Rs 5,000 and so on. These requirements are like a checklist to ensure orderly maintenance of the books of account and overall governance of trusts, but do not require auditors to opine on the state of affairs of the trusts.
However, Section 12A(b) of the Income Tax Act requires the audit report to opine on the true and fair view of the state of affairs of the trust.
Trusts as an instrument are used in religion, education, healthcare, charity work and other areas of society involving collection and use of large sums of money; there is urgent need to bring in transparency and better accountability in this area.
Also, large public trusts should be required to make their financial statements/ audit reports available in the public domain.
Hemant M. Joshi is Partner and Nikhil Kenjale is Manager, Deloitte Haskins & Sells .