In March, the charities bureau of the attorney general of New York State in the US opened an investigation into the financial governance of the board of the Cooper Union for the Advancement of Science and Art.
The previous year, the Manhattan college had started charging tuition fees for the first time, saying it would otherwise face financial collapse, The New York Times reported. The paper said the regulator's intervention was pre-emptive rather than reactive and part of a "broader strategy to get ahead of potential crises by 'stress testing' non-profits that show signs of potential trouble".
Karl Wilding, director of public policy at the National Council for Voluntary Organisations, says there are lessons to be learnt from the attorney general's approach to this case - although stress tests run by the Charity Commission would, he says, be a step too far. "I don't want a Minority Report-type situation where they send in the police before you've done anything wrong," he says. "But any tools that help charities think about how they would operate under certain financial circumstances - if they have a plan B, for example - would be a good thing."
Sarah Atkinson, director of policy and communications at the commission, agrees that New York-style stress testing should not be the regulator's job. But she adds that the commission can "achieve similar outcomes with a less invasive approach" by giving trustees tools such as its Big Board Talk checklist and by the transparency requirements it places on charities.
Atkinson says the regulator is improving its systems and use of data for assessing and responding to risks faced by individual charities. "Once implemented, our new systems will significantly enhance our ability to see problems as they arise and take early action," she says.
Meanwhile, there is also clearly scope for charities to be better at financial planning and for internal stress testing. Nick Sladden, head of charities at the accounting firm Baker Tilly, cites its recent survey of 120 charities, which found that 40 per cent of them did not include future projections in their financial management reports. Sladden believes most of those who did would not look very far ahead. "When charities think about financial planning, they are often thinking only up to the end of the next financial year, and that can sometimes hide significant problems," he says.
Stress testing should involve picking out the critical factors for success and viability, says Sladden. A charity might think of how it would be able to cope with a drop of 10 per cent in, for example, public sector funding, membership numbers or paying service users. What about 20 per cent? Or 50 per cent? "It is crystal-ball stuff to some extent, but it's about taking an educated guess," he says.
Kate Sayer, a partner at the accountancy firm Sayer Vincent, adds repayment terms on loans to the list of financial planning factors that charities should keep close tabs on - especially given that the sector is relatively inexperienced at using loans.
However, she acknowledges that, for many charities - in particular those frequently retendering for contracts - it will be difficult to think very far into the future. "Trustees and finance professionals should be looking longer-term, but some would say we don't even know where we're going to get funding from next year," she says.