The Charity Commission has issued several updates on financial matters. In no particular order these cover: reserves, total return, auditors’ reports on matters of material significance and a review of the quality of filed accounts.
According to the latest Charity Commission research, less than a quarter of larger charities accurately reported in their trustees’ annual reports the level of financial reserves they held.
Although almost all of those surveyed included at least a reference to their reserves policy in their annual reports, less than a quarter gave the right reserves figures, based on the information in their accounts. A third of charities failed to include figures at all.
The commission says its findings suggest an incomplete understanding of what reserves are, which could lead trustees to making poor decisions about their charity’s finances.
The Charity Commission has completed a post-implementation review of the total return investment regime. It concludes that the current framework does a good job in balancing greater investment flexibility with protection of permanent endowment; and, despite calls to make the guidance simpler, the rules will remain basically unchanged. Two minor regulatory changes are proposed, in draft regulations already issued.
It seems odd that time can be found for issuing these regulations that affect so few charities, compared with the much overdue replacement of the 2008 accounting regulations, which affect every charity.
In February 2018, the commission published research on auditors’ compliance with their reporting duties where they encounter a matter of material significance at a charity. It found that out of 114 audit opinions that should have led to such a report, only 28 were received. In a sign of a continuing toughening up of the regime, the commission has now set out how it followed that up with individual firms and says that in future it will simply refer non-compliant auditors – and professional independent examiners – to their professional body without prior notification or warning.
Revised reporting procedures are due to be issued in the spring. Meanwhile, trustees need to be aware of the list of matters of material significance – which are not the same as the reportable serious incidents list – and of the duty placed upon an auditor or independent examiner to report these matters to the regulator.
These reports should not be confused with other whistleblowing reports. The Office of the Scottish Charity Regulator is a "prescribed person" under the Public Interest Disclosure Act 1998 and reports that it received seven whistleblowing reports in 2017/18, of which four led to statutory inquiries, two of which are ongoing.
The commission has reported on its latest survey of year-end filed accounts. It says that 70 per cent met the basic benchmark, compared with last year’s 74 per cent. This four percentage-point drop is described by the commission as a significant deterioration. Apart from pages and dates missing, the common themes are that most of the deficient accounts provided little or no information on the charity’s purposes and/or the activities carried out to achieve them. Sometimes this was coupled with other issues, such as incomplete accounts, an independent scrutiny report or an overall lack of transparency.
All of the above developments might suggest that trustees would welcome more simplicity in managing their charities. There might be some hope in the consultation launched in December "to seek views on how best to reform the process for developing the Statement of Recommended Practice, and to make recommendations for any necessary changes to ensure the Sorp remains fit for the future". The review will explore ways to ensure the Charities Sorp serves the information needs of those with an interest in the charity sector, and of the sector itself.
Meanwhile, there have been a number of tax developments, none of them major or of general application to all charities, but worth being aware of. The Office of Tax Simplification published its first review report on inheritance tax. This focused mainly on administration, but there will be a follow-up in spring 2019, looking at more complex issues such as how the charity exemption operates and how these more complex aspects of the tax could be simplified.
HM Revenue & Customs has also now clarified the meaning of "not-for-profit organisations that are not set up as a company", which will benefit from the delay in mandating Making Tax Digital until 1 October 2019. The following will be treated as though they are a company: companies set out by royal charter, letters patent and acts of parliament. In other words, these organisations will not benefit from the deferral.
Don Bawtree is lead partner for charities at accountants BDO LLP