Charitable advice

Charitable advice

The Charity Commission will shortly embark on a large-scale exerciseintending to sharpen the fiscal awareness of some of the UK's majorcharities

‘The bottom line is that if you as an organisation are in receipt of public money then you have to expect to be accountable for those monies,’ says Hugh Rogers, spokesman for the Charity Commission.

Buoyed up by the 1993 Charities Act, which now legally requires charities turning over more than # 250,000 to have their accounts audited, the Charity Commissioners are busily planning a large-scale ‘exercise’ – they don’t like the term ‘investigation’ – involving the household name charities in England and Wales. ‘We like to think of what we’re going to be doing as an interactive affair – an opportunity for us to work more closely together,’ explains Rogers.

Two SORPS (Statement of Recommended Practice) and a SOFA, cooked up by a cabal of accountants and charity professionals, have finally cut through the woolly muddle that besets a sector naturally more interested in philanthropy than accounting.

On paper, at least, they have. In reality, it is the pro-active stance of the Charity Commissioners – founded in Elizabethan times and given fresh life under Lord Brougham in 1853 – that’s having the biggest impact in sharpening fiscal awareness among charity trustees and managers.

The basic framework for co-operation between the audit profession and the Charity Commissioners – both of whom are charged with the responsibility for seeing that charities get their fiscal act together – is relatively straightforward.

The revised SORP was prepared by the usual committee of users from the sector together with audit and accounting professionals and was approved, again in the usual way, by the Accounting Standards Board.

The Commissioners, who chaired the committee, have since stated that while the SORP is just that, a recommendation and not a standard, they will expect all charities to follow the guidelines or ‘provide a clear explanation of the reasons for any departure from it’.

The duty of defining how audits should be conducted falls, as usual, to the Audit Practices Board. The APB issued a consultative document on charity audits in February this year, with an April closing date for comments.

It has now completed its evaluation of the response and expects to issue a practice note imminently.

In so far as the Board’s relationship with the Commissioners is concerned, the 1993 Act made it quite clear that auditors have a duty to report anything of material significance which relates – in the convoluted terms of the Act – to the exercise of the Commissioners’ functions to institute enquiries or protect the assets of charities. The APB Practice Note, when it appears, is expected to provide some guidance on exactly what might trigger some action from the Commissioners.

The profession, it seems, is to be left to set up the theoretical framework, which is no more than sensible. But this doesn’t mean the Commission is going to sit around and wait for the ASB to pronounce on every issue.

It is, and intends to remain, a very ‘hands-on’ body with a highly pragmatic approach to its area of responsibility.

This emphasis on pragmatism gives the Commissioners a real advantage in areas where theory is notoriously difficult to formulate, charitable reserves being an obvious case in point.

This particular issue is a perennial one. Charities are considered to be in the business of disbursing funds in accordance with their charter.

The public is seen to become somewhat restless when it hears that x or y charity is sitting on pots of money while actively canvassing for more.

So part, at least, of the Commissioners’ imminent interactive, getting-to-know-you exercise with the major charities will delve into this question.

‘We’re simply going to be asking the 200 largest charities, where reserves are an issue, what their thinking on the matter is. Are they holding the level of reserves they are by accident or design? And if it’s by design, why?’ says Rogers.

Signposts

At the end of the fact-finding process the Commissioners hope, as Rogers puts it, ‘to give charities signposts as to the kinds of things they should be thinking about when the question of reserves comes up’.

This is an approach that’s likely to prove more fruitful than a more rigorous ‘philosophical’ exercise that aims to find an all embracing algorithm or formula capable of settling the issue of what constitutes an appropriate level of reserves for any and all charities. But the Commissioners – and everyone else involved – will need to bear in mind that, in the absence of theory, pragmatic decisions have been known to descend into the arbitrary and eccentric realms once in official hands. Some of the decisions taken by tax inspectors, which had to go to the tribunal and the courts to get overturned, are testimony to this.

The APB’s Sheila McAlpine points out that as far as auditors are concerned, this is not a particularly pressing anyway. The auditor’s role is simply to ensure that reserves are correctly stated as part of the ‘true and fair’ principle. Judgements about when they are excessive are the remit of the Commissioners and the charity’s trustees.

In a funny kind of way, though, the same is not true when the auditor has reason to believe the reserves, and the likely fund-raising capability, are not sufficient to meet the charity’s commitments. At this point the ‘going concern’ provisions, implicit in the SORP (since it is prepared in accordance with existing accounting standards for the corporate sector) apply.

Paul Bussy, a principal in Coopers & Lybrand’s charity unit in London, is one of many auditors who believe the going concern provisions are particularly difficult to apply to charities other than where the income is guaranteed by existing investments and bequests. Where future revenue streams are not dependable, he points out, the auditor is inevitably driven back on the question of reserves when forming a ‘going concern’ view.

‘It’s probably true to say that many trusts and charities have not thought through what it is that their reserves are supposed to be doing. A lot of charities leave it all in one pot called the general fund. Yet when you examine that fund it frequently turns out that the monies are being set aside to fund fixed assets. So they should be put into a designated fund called capital reserves’ which then help to identify what it is that the so-called free reserves actually are,’ he notes.

Whether the Commissioners will get as good an answer as that from the trustees and management of the top charities remains to be seen. More difficult yet for all parties – charity trustees, auditors and the Commissioners – is the vexed issue of restricted funds.

This is a theoretically simple issue with irritating and costly implications for charity accounting. So much so that the vast majority of charities now tend to discourage would-be benefactors from attaching eccentric or overly punctilious conditions to their bequests.

According to the SORP, which comes into force for accounting periods beginning on or after 1 December 1995, each and every such hedged-about bequest has to be separately accounted for. The reason, again, is that it’s deemed the public feels strongly that if you receive monies for a specific, stated purpose, those monies should be spent on that purpose and not on another that the charity’s trustees might consider more worthy or, at least, a great deal more convenient.

‘The problem is that up until now some charities have not really been properly segregating restricted funds,’ warns Heather Wheelhouse, a partner in Binder Hamlyn’s charities unit.

Separating out these funds is going to be a long and tedious exercise.

It will also cost charities money which they’d much rather spend on their worthy causes and prime mission – and not on accountants.

In fact, one of the best parts of the new ‘relationship’ – Rogers’s description – between the Commission and those charities caught up in its exercise is that however irritating or distracting they may secretly find it to have the Commissioners mulling over their books, at least there won’t be a huge bill on its way.

Free services

The Commissioners are allowed to charge, but only for copying documents.

This state of affairs, however, may change since they’re sensible enough to see that there is no compelling reason why accountants should be able to extract substantial fees for something which the Commission’s officials are compelled to offer for free.

Indeed its own booklet, Charity Accounts – the New Framework, hints in the foreword that the Commissioners are looking for a change in the regulations governing their charging structure to enable them to bill charities for services other than photocopying.

The present fee-free basis is only possible because, unlike the audit profession which has to earn its living, the Commission and its substantial staff of 600 – split between three offices, in London, Taunton and Liverpool – is funded publicly to the tune of some # 23m a year.

Its job, as defined in passing by the 1993 Charities Act, has four main functions: to maintain a public register of charities; to investigate misconduct and abuse of charitable assets; to give advice to trustees; and to ‘modernise the purposes and administrative machinery of charities’.

Still, those members of the audit profession with an interest in providing advice to the sector will draw comfort from the fact that the Commissioners are more than an alternative, free source of advice for the sector.

They are also its regulatory body. This fact alone is likely to cause a number of charities to hesitate before selecting the Commissioners as the first line of advice on things fiscal.

Anthony Harrington is a freelance journalist.

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