Transparency and clarity are at the heart of the new Sorp accounting rules that charities must now follow when compiling their annual accounts.
No one doubts these are worthwhile aspirations, but there is a danger that the new requirement for charities to declare in full any principal risks they face could end up being a risk in itself.
If this were to happen, at best the requirement would be ironic, and at worst self-defeating.
Identifying and recording risks
The Charities Sorp (FRS 102) requires increased disclosure in the trustees’ report in an effort to improve risk identification and management.
In the past, it was enough for charities to indicate that the major risks they faced had been reviewed and systems put in place to manage them.
Under the new rules, however, they must now disclose all the principal risks they face and the procedures that are in place to mitigate those risks.
This information needs to be available in the trustees’ report, which should be reviewed regularly by the trustees (at least once a year).
In practical terms, this means charities need a "risk register", a requirement that was already in place, which should be checked and reviewed by management and the board regularly to ensure that any mitigation processes are adequate and appropriate.
Disclosure at all costs?
There is no question that transparency is a must for charities; organisations that are beholden to the public must be 100 per cent accountable.
But the new rules do raise serious questions: is risk disclosure actually a risk in itself? In the quest for transparency, are we shooting ourselves in the foot?
The danger is that if the risks a charity faces are made public, risk-adverse donors will be scared off.
Let’s say you’re a potential funder – you run a trust or you’re a member of the public – and you’re looking at a charity’s accounts. The fact that there are certain key risks being considered by the organisation could provide you with comfort that the organisation is well managed. Conversely, this might act as a deterrent.
For example, if the charity discloses that one of its risks is a reliance on public donations, by definition it lacks a regular income stream. If that’s deemed a risk, as a potential funder you might decide this is too risky because your money could be wasted.
You would hope that a funder would still donate, but if such things are brought to the fore in such a formal document, they could raise concerns.
Mitigation in mind
But does it demean the position of the charity, sowing doubts in the public’s mind, even if mitigation procedures are disclosed?
And how do you tackle this issue? We can only be 100 per cent transparent – charities should be open about what their risks are, and that’s what we advise our clients. If you don’t disclose the risks, you’re being naive and not telling the whole story. Meanwhile, if you don't disclose a principal risk, you create a further risk to your reputation that the public will find out about the non-disclosure.
There is also the issue of the definition of the "principal risks" a charity faces. It’s open to interpretation what exactly "principal" means here. Does it refer to the risks that could cause most damage, or those that are more likely to occur?
The first year of these new rules is likely to be the hardest because we are all still learning. We are just starting to see the first sets of accounts being filed. Some disclosures might be missed, or not detailed as well as they could be. Next year we’ll have more experience, and will be able to observe others and adapt from there.
There’s no doubt that charities must be transparent. But the new rules do raise questions – could listing all principal risks end up jeopardising the reputation of certain charities? Is the act of disclosing risk actually a risk in itself?
Jonathan Lachmann is a principal at the chartered accountants HW Fisher & Company