Accounting matters a great deal for charities

Published by Paul Maguire on

Estimated reading time: 6 minutes


The Charity Commission (24 January 2020) recently announced that it can now refer cases of poor professional practice by accountants and finance professionals to the Association of Chartered Certified Accountants (ACCA), a Designated Professional Body under the Financial Services and Markets Act 2000. The two bodies have signed an agreement on data-sharing, which facilitates the referral of concerns about accountancy services provided to charities.

The announcement

The announcement is part of the Commission’s efforts, in conjunction with the accountancy and audit profession, to improve the quality of financial reporting by charities and to encourage the highest professional standards amongst finance professionals working with the charity sector. It follows the launch of the external security benchmark in August 2019 (see below).

The agreement between ACCA and the Commission will allow the Commission, in certain cases, to share details about individual members with their professional body, and ACCA in turn to share information with the regulator. ACCA can ultimately institute disciplinary proceedings against a member, if circumstances warrant this. The Commission sees the agreement as a useful aid to alerting ACCA to poor practice and hopes that, by raising the standards of ACCA practitioners who undertake external security work for charities, it will help charities to comply with their accounting and legal obligations.

The background

The background to, and impetus for, this data-sharing agreement may be found in a series of accounting reviews carried out by the Commission in recent years. These revealed that a surprisingly large minority of charities, particularly amongst those with annual income of less than £25,000, have consistently failed to publish accounts of “acceptable quality” in the opinion of the Commission. In announcing the data-sharing agreement with ACCA, the Commission notes that some finance professionals are: 
 

"unaware of important changes to rules on accounting, the requirements for independent examination [of financial statements] and some of the reporting duties for those examining or auditing in charities."

The external security benchmark referred to above was introduced in August 2019 and has been in effect since 1 September 2019. Charity trustees are required to have an external scrutiny of their charity’s accounts if the charity has a gross annual income of over £25,000 in a reporting period (financial year). The external scrutiny is either an independent examination (a limited check of certain specific matters) or an audit, where the auditor gives an opinion on whether the accounts give a “true and fair” view. Evidence from the Commission’s research into charity reports and accounts has shown that too many independent examiners and auditors appear to lack the necessary understanding of the external security framework for charities and of their reporting duties.

The regulator was forced to introduce the benchmark after repeated evidence of shortcomings in the standard of financial reporting in the charity sector – and, consequently, of failures in the scrutiny of financial statements. As the table below shows, between 2012 and 2015, a disappointingly low percentage of both small and larger charities published accounts rated as being of acceptable quality by the Commission.

Charity Commission review on quality of charity accounts

Percentage of charities publishing accounts of acceptable quality (as defined by Commission)

Year ending Charities with income
  <£25k >£25k
31/03/12 49% 54%
31/03/13 47% 68%
31/03/14  47% 77%
31/03/15 55% 75%
31/12/15 64% 74%

Monitoring

More recent monitoring reviews carried out by the Commission have emphasised particular aspects of the reporting regime, without finding any notable improvement in financial reporting standards. For example, in 2019 the Commission published its findings on the reporting of related party transactions in charity accounts, and on auditors’ and independent examiners’ compliance with their responsibilities. 

For related party transactions, less than two-thirds of charities in the Commission’s lower income samples (£25,000 – £250,000 and £250,000 - £1 million) fully complied with the Charities Statement of Recommended Practice (SORP) requirements. The number in full compliance with related party transaction disclosure requirements improved for charities with income over £1 million, but even in this sample 14% of charities failed to fully report such transactions.

The Commission recorded the accountancy body of which a charity’s auditor or independent examiner was a member, and found that in most cases they were members of ACCA or the Institute of Chartered Accountants in England and Wales (ICAEW). The Commission subsequently provided details of members who had audited/examined accounts which had not fully disclosed related party transactions to ICAEW and ACCA, who agreed to write to the members concerned reminding them of the obligation to check compliance with the SORP. The Commission has also asked ICAEW and ACCA to ensure that all of the members concerned have responded to them, and to indicate which members should also have reported to the Commission.

Conclusion

It is clear that the Charity Commission, as the regulator of registered charities in England and Wales, has concerns about not only the quality of financial reporting by charities in their annual reports and accounts, but also the standards of scrutiny of charity accounts by auditors and independent examiners. There are potentially serious consequences here for the charity sector. If users of accounts lack confidence in their reliability there is an associated risk of reputational damage to the charity concerned. The consequent threat to the charity’s fundraising ability and public goodwill should not be underestimated.

The Charity Commission website contains much helpful guidance for charities seeking to navigate a path through annual disclosure requirements for their report and accounts. Please contact Paul Maguire in our Cheltenham office for further information.   

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