Don Bawtree: Charities do not always recognise how vulnerable they are to fraud

Also: new company disclosure requirements; and new rules on preventing companies collapsing

Don Bawtree
Don Bawtree

After so many high-profile corporate collapses, new rules called ISA 570 have been introduced to give more warning about an organisation’s ability to continue trading. The rules will require auditors to do more work on "going-concern" assumptions, but this in turn means that boards will have to spend longer looking at their business models and keeping their longer-term projections up-to-date and realistic.

Auditors will in future be asking to see these and interrogating them more rigorously. The new rules come into force for December 2020 year-ends, but can be applied sooner. ISA 570 does not apply to independent examinations directly, but examiners are often also expected to address going concern.

Annual reports

For 2019 year-ends onwards, many companies have to make more disclosures in their annual reports. The exact requirements depend on the company’s size, measured mainly by income and numbers of employees, and whether or not it is listed. Because some charities are also companies, Sorp Information Sheet 3 has been issued to explain what they need to do. Other charities may choose to follow suit voluntarily.

The three new requirements addressed so far are:

  1. How a company has acted to promote the success of the company: the information sheet equates success to achieving the charity’s objects.
  2. How directors have engaged with employees: the information sheet suggests that this should also cover volunteers.
  3. How directors have engaged with suppliers and customers: the information sheet widens this to other stakeholders, such as service users, beneficiaries, funders and the wider community.

The information sheet provides more guidance in each area and should be consulted for the full requirements.

Similar information sheets are likely to follow in due course. For instance, the Streamlined Energy & Carbon Reporting scheme requires organisations to report energy and carbon emissions in their annual reports. Official guidelines say that businesses are required to comment on any energy efficiency projects and provide a narrative description of the principal measures taken to increase energy efficiency during the relevant financial year.

Fraud in the charity sector

The Charity Commission, along with the Fraud Advisory Panel, has updated its study on fraud in the sector, originally published 10 years ago. Although there are encouraging signs that the sector is more geared up to the risk, the findings are still sobering. More than two-thirds of charities (69 per cent) think fraud is major risk to the charity sector, and insider fraud is recognised as one of the biggest threats.

But the findings show that charities are not always recognising how vulnerable they are and are not consistently putting basic checks and balances in place. More than a third think their organisation is not vulnerable to any of the most common types of charity fraud, 53 per cent of charities affected by fraud in the past two years knew the perpetrator and 85 per cent of charities think they are doing everything they can to prevent fraud, but almost half don’t have any good-practice protections in place

The continuing gap between awareness and practical action poses a threat to charities’ valuable funds and to public trust and confidence in the sector.

A similar threat exists in a general undervaluing of charities as a whole. Another recent report from the Charity Commission warns of the danger of public perception failing to differentiate between charity, public and private sector provision. It concludes: "The question for the charitable sector is how best to maximise its value and the broader contribution it can make to society while safeguarding what has made charity a cherished part of our national life in the first place."

Don Bawtree is lead partner for charities at accountants BDO LLP

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