There has been a huge focus recently on financial reporting and the role of auditors, arising from the Carillion case. The lessons learned, listed in the report by the parliamentary committee, are worth considering by the charity sector too. They include that personal agendas can lead to "reckless short-termism" in running organisations; that regulators need to "compensate" for the limitations on stakeholder engagement; and that auditors need to manage their own conflicts of interest.
It will take some time for the full implications to work through the regulatory set-up, but trustees could apply these lessons now. The conclusions certainly create an opportunity for trustees to reflect on their culture and their relationships with their advisers.
Press reports suggest that the government is about to propose new reporting duties on larger companies and quoted companies. These are likely to include publishing the ratio of chief executive pay to the average worker’s salary, and clear evidence that the board has considered the interests of all stakeholders. Governance codes are likely to be extended to private companies and the code for quoted companies revised. Charities are adopting the charity governance code already and, after the National Council for Voluntary Organisations’ recommendations on executive pay, will find themselves ahead of the game.
Rather oddly, the Office of the Scottish Charity Regulator has reported that, after the addition of Scottish Charitable Incorporated Organisations in the registrar’s Index of Company Names, some SCIOs have received letters from HM Revenue & Customs about the formation of a new company corporation tax, and asking for information on business activities. This has arisen because the law requires SCIOs to appear alongside the names of companies when a user makes a search through Companies House’s WebCheck.
The Charity Commission has issued a new report focusing on insider fraud, which it admits is not necessarily based on a representative sample, but nonetheless contains lessons to learn. The report follows on from some cases of insider fraud in charities, one where the former chief executive stole £900,000, and another where a head of finance diverted almost £54,000 for personal use.
Of the 96 per cent of those that responded to the commission, specific observations included who committed the insider fraud. The commission found that 43 per cent were by an employee, 33 per cent by a trustee, 10 per cent by a volunteer and 10 per cent were designated as "other".
The other observation was what factors contributed to the fraud. The report says that 43 per cent of respondents suggested the prime factor was excessive trust or responsibility placed on one individual, and 24 per cent said there was a lack of challenge or oversight. Another 24 per cent involved either absence of controls or existing controls poorly applied, and 5 per cent confirmed it was due to a combination of more than one factor.
The commission said that the vast majority of insider frauds were enabled because of either excessive trust/responsibility placed on one individual or a lack of challenge and oversight. Fundamentally, it says, these are cultural issues that require a change in mindset and behaviour within charities.
The Fundraising Regulator has issued guidance on the implications of the new reporting requirement introduced by the Charities Act 2016. An earlier version, issued in conjunction with the Charity Commission, was less clear and even ambiguous in places, and was subsequently withdrawn.
The commission suggests that trustees should say something positive about their compliance with the voluntary regulation scheme in their annual reports, and that charities would benefit by giving donors confidence in the charity’s compliance with best fundraising practice. Smaller charities will also be able to demonstrate that the charity is seeking to comply with best practice.
The guidance reinforces the need for charities to report this information and serves to alert examiners and auditors to think about their reporting duties when checking these disclosures.