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Charity Commission accounts reviews: what to act on?

Over the last few years, the public perception of the charity sector has been adversely impacted in the wake of various high-profile safeguarding scandals.

Since then, the quality and transparency of information presented in annual accounts has also come under criticism following a series of Charity Commission reviews. This insight aims to give trustees guidance on ways to enhance their annual reports and accounts in light of the regulator’s findings.

About the author

Kunal Mistry

+44 (0)20 7710 0352
mistryk@buzzacott.co.uk
LinkedIn

Since then, the quality and transparency of information presented in annual accounts has also come under criticism following a series of Charity Commission reviews. This insight aims to give trustees guidance on ways to enhance their annual reports and accounts in light of the regulator’s findings.

Public benefit reporting

The review of public benefit reporting used the Charity Commission’s publication ‘Public benefit: reporting (PB3)’ which compared and reviewed 105 trustee reports.  

About the author

Caroline Boardley

+44 (0)20 7710 2600
BoardleyC@buzzacott.co.uk

Public benefit reporting

The review of public benefit reporting used the Charity Commission’s publication ‘Public benefit: reporting (PB3)’ which compared and reviewed 105 trustee reports.  

Assessments relayed whether trustees’ annual reports contained:

  • An explanation of the activities undertaken by the charity to further its purpose for the public benefit, and 
  • A statement by the trustees that they have had due regard for the Commission’s guidance on public benefit (the public benefit statement).

The review found that 52% of reports demonstrated a clear understanding of the requirements.  In 66% of cases, the reports met at least one of the two aspects of public benefit reporting, meaning that over 30% of the accounts reviewed did not meet either requirement. 

The reports that met the requirements were those that considered the reporting as more than a standard statement and used it as an opportunity to reflect on the impact the charity has had, whether to its direct beneficiaries or the wider public.

The Commission provides three examples of how trustees had met the requirements:

  • Expanding the public benefit statement to also explain why the trustees believed the activities of the charity had provided a public benefit;
  • Explaining who had benefited from the charity’s activities; and
  • Explaining the impact of the charity’s work.

The trustees’ report is a key method of communication that’s available to the trustees to communicate the activities of the charity to the public, particularly for fundraising charities. It should be seen as an opportunity to explain the work they are undertaking rather than making a standard statement that provides little insight into the impact that the charity has on its beneficiaries.

Reporting reserves

The Charity Commission has also focussed its review on the disclosure of free reserves and reserves policies given that the setting and monitoring of such a policy is key to helping maintain a charity’s financial resilience. It requires the trustees to understand both the financial risks the charity faces as well as the resources that can be drawn on when required.  This is even more critical at a time of increased financial uncertainty with the onset of the Coronavirus pandemic.  

The Commission reviewed the sampled accounts to assess whether they met the following two criteria:

  • The charity had explained its reserves policy, and
  • The charity’s stated level of reserves was correct based on the guidance provided by the Commission.

Of the 106 accounts that were sampled, 97% included a reference to their reserves policy in the trustees’ report, however more than a third did not provide all of the basic information required, with the target level of reserves being the most common omission.

The Commission also reviewed the stated reserves level and compared this to the expected free reserves figure based on the following calculation:

Unrestricted reserves

£100

Less:

 

Intangible and tangible fixed assets

£(60)

Programme related investments

£(10)

Designated reserves

£(15)

Free reserves

£15


Using this basis for the calculation for free reserves, only 22% of charities had included the correct figure in their reserves policy. The underlying reason for this appeared to be that trustees considered free reserves to simply be their unrestricted reserves.

The risk of this is that trustees do not have a complete understanding of the reserves position of the charity and the amount that they are able to draw on when necessary, particularly when large amounts are tied up in buildings and other illiquid fixed assets.

The key lessons that can be learned from this review are; that providing a clear explanation of the reason why reserves are needed, the level of reserves required by the charity and the level of reserves held is more beneficial to the charity and goes beyond being a pure reporting requirement. To be able to complete these calculations to the appropriate standard requires a detailed review by the trustees which will ensure that they understand the needs of the charity and the liquid funds they have available to them.

Related party transactions 

The Charities SORP has three specific requirements that all charities must comply with when preparing their financial statements. Accounts prepared under the accruals models must disclose:

  • Trustees’ remuneration (including benefits paid);
  • Expenses paid to trustees by the Charity; and 
  • All transactions with persons and entities that are closely connected to the charity or its trustees, regardless of monetary value. 

If a charity has not entered into any of the above transactions, it is a requirement to disclose this fact to ensure clarity for the user of the accounts. Trustees have a duty to act in the interests of their charity rather than for any private benefit and often, even if no such private benefit is received, trustees fail to appreciate the need for transparency.

During a recent study, the Charity Commission reviewed 262 sets of accounts from the 2017 financial year and found that a significant proportion of charities were not fully reporting these transactions. The prime reasons cited was due to the requirements not being fully understood. The Charity Commission found that only 55% of smaller charities (income of between £25,000 and £250,000) included the correct disclosures, compared to 86% of larger charities (income of over £1 million). The most commonly missed disclosure being the transactions with connected entities or trustees. 

The key message here is that a lack of transparency can damage public confidence in the charity sector, and cast doubt on the integrity of the respective charity’s governance arrangements. Whilst trustees can delegate the preparation of accounts to management or to a firm of accountants such as Buzzacott LLP, it is ultimately their responsibility to inform the preparer of all potential related parties and ensure that any conflicts are adequately managed and recorded.

External scrutiny benchmark

In conjunction with charities and the accounting profession, the Charity Commission has published an ‘External Scrutiny Benchmark’ with the aim to help charities meet a minimum standard in their annual accounts.  This enables the public to read the accounts with confidence as it will act as a mechanism to check that a minimum standard of work has been undertaken by a charity’s auditors or independent examiners. The benchmark helps to facilitate the regulatory case work carried out by the Charity Commission by identifying the external scrutinies that fail to meet the benchmark. 

The benchmark comprises 15 basic criteria including whether there is a trustees’ report, the inclusion of a correctly worded auditor’s report (or independent examiner’s report) and checks the accounts add up correctly and whether the accounts are internally consistent (e.g. closing funds on the statement of financial activities being the same as the balance sheet). 

The benchmark also refers to a number of commonly missed disclosures with the requirement for the statement of financial activities to incorporate an income and expenditure account and details of related party transactions (as noted above).

Trustees should use this benchmark tool to perform simple checks on the accounts before approval as this will help ease the Charity Commission’s concerns of accounts being inaccurate, out-of-date and not providing the information required to be held accountable to donors, beneficiaries and the general public. 

It is important to note though, that although the benchmark covers the vast majority of charities, it does not cover Common Investment Funds, Common Deposit Funds or educational or housing charities that do not prepare their accounts in accordance with the Charities SORP.

The level of scrutiny undertaken by the Charity Commission on submitted accounts is increasing and it is therefore imperative for trustees to comply fully with the requirements of the Charities SORP. This will help in restoring public trust in the sector. It is the collective responsibility of trustees and their auditors or independent examiners to ensure the operations and financial results of charities for any given period are not misrepresented. 

Speak to an expert

If you would like assistance to ensure your charity accounts meeting the requirements as set out by the Charity Commission, please get in touch with a member of our team today by completing the form below.

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