Don Bawtree: Cultural change at the top, a clean bill of health on tax and clearer reporting

The lead partner for charities at accountants BDO LLP provides an update on charity finance

Identifying cultural weaknesses should help charities be more efficient, writes Don Bawtree
Identifying cultural weaknesses should help charities be more efficient, writes Don Bawtree

Governance

The Charity Commission often focuses on governance and the tone adopted by those at the top of charities, so it is interesting to note a new report by the Chartered Institute of Internal Auditors that calls for internal auditors to identify cultural weaknesses and address the "need to change corporate culture".

Reflecting on various recent scandals across different sectors, including banking, the media and healthcare – all of which revolved around culture, management behaviour and ethics – the institute calls for internal auditors to "undertake root-cause analysis".

This should help to identify and address cultural weaknesses and target cultural "indicators", such as recruitment policies, training, performance management and reward. Charities might arrive at different indicators, but the same principles can still apply and can also be considered by organisations that don't have a formal internal audit function.

That same culture should result in an organisation losing less money because of fraud or careless waste. For instance, most charities have a loyal and dedicated workforce, but trustees might still want to ponder the findings of a report on sick days, published in July by the professional services firm PwC. The report said that one in three people in employment had admitted to pulling a sickie, and that the most common reasons cited were hangovers, boredom and going for other job interviews.

Tax

Charities have been very involved in debates about tax abuse, whether the topic is campaigning against it, being unwittingly exploited or, on occasion, allegedly forming part of planning schemes. For many reasons, then, the sector should welcome new proposals in the Finance Bill that might result in some promoters of tax schemes being penalised by up to £1m if they don't disclose their promoter status, whether they are monitored by HM Revenue & Customs, and whether they notify their clients. Charities should always be alert to opportunities presented to them that seem to generate cash or donations on terms that are too good to be true.

Changes to the ethical standards for auditors mean that, from December, audit firms will no longer be able to charge companies contingent fees on some areas of tax advice. It is another reminder of the importance of audit independence, and of why treasurers and audit committees must have a clear understanding of the services provided to them by their audit firms.

Reporting

The Financial Reporting Council has recently announced a programme of work to promote clear and concise reporting. It would seem that in the commercial world the users of accounts – usually investors – still feel that the key messages about the business are obscured by the language used. The new Sorp will make precious little contribution to reducing the length of charities' reports and accounts, so trustees might want to make sure that their reporting is at least valuable and unobscured.

The FRC has therefore recently published Guidance on the Strategic Report, the new reporting requirement now incorporated by many charities into their trustees' annual reports. Future FRC projects will focus on cutting "clutter", where it gets in the way of clear and concise reporting.

The guidance puts a lot of emphasis on what is relevant or material to shareholders – but it is always difficult to translate this to charities, where the commonly used equivalent is "stakeholders". However, the match is inexact and needs careful thought to prevent reports becoming unwieldy. Directors are encouraged to be innovative, maintain a balanced report and link up relevant sections. Companies are also encouraged to signpost sources of further information in related publications – we are seeing this already as charities consider how to adopt recommendations on executive pay made by the National Council for Voluntary Organisations. Not all of the FRC guidance applies easily to the charity sector, but the principles are ones that the sector should welcome.

Don Bawtree is lead partner for charities at accountants BDO LLP

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