With increasing uncertainty about so many income streams, charity trustees must continue to focus on their ability to manage and respond to financial risks. One of the most important of these is the ability to protect a charity's good name and reputation.
The new charities legislation is also likely to make it important for trustees to consider not only the reputational risks to their own organisation, but also those threatening the broader charity sector.
The value of brand presence has been underlined by the latest report from the Quoted Companies Alliance, with BDO, based on a poll of 220 small and medium-sized companies. It says that only two-thirds have measures in place to manage reputational damage, and 40 per cent of financial advisers said their clients had made no preparations for reputational shocks at all. The QCA and BDO estimate that 28 per cent of a UK company's value is accounted for by reputation.
Charity brand values are not so easily measured, but the findings emphasise the importance of making sure reputation is properly considered. This is illustrated by Third Sector's Charity Brand Index, most recently published last summer. In 2015 there were major movements in brand rankings, attributed to successful campaigns, good communication and negative media coverage, as well as to general factors such as a decline in public trust in charities. Problems like these affect charities whose donor support relies more on brand awareness than personal involvement.
When thinking about reputational damage, trustees need to keep an eye on what is happening in the wider sector. After a torrid year, 2015 ended with the Information Commissioner's Office issuing an enforcement notice to one charity that suffered two security breaches. There was also continuing debate about how another charity resolved cases of historical abuse - in this case, the alleged perpetrator had already died. Both of these types of risk can present severe financial challenges if they damage a charity's donor support, and are good examples of the sorts of issues that trustees need to be thinking about.
As trustees start to prepare their first sets of accounts under the new statements of recommended practice, some might be disappointed to discover that they still cannot attribute any value to general volunteer time, despite some strong lobbying to the contrary over the years. Instead, the role of volunteers should be explained in the annual report, on the basis that they cannot reliably be valued. It is ironic, therefore, that the Office for National Statistics recently estimated that 15 million people in the UK volunteer on a regular basis, offering 4.4 billion hours of work a year, equivalent to almost 10 per cent of the paid hours worked in the UK. The ONS has estimated the economic value of volunteering could be worth as much as £50bn a year.
The Financial Reporting Council has written to larger quoted companies ahead of the reporting season summarising key developments for 2015 annual reports. Some of its points are relevant to charities. For example, the FRC encourages companies to report clearly and concisely, ensuring that annual reports contain information relevant to investors or stakeholders.
On risk reporting, it says investors are surprised that risks relating to data protection in IT systems, cyber risk and climate change "are not reported more often as principal risks".
On disclosures, the FRC says: "Effective disclosure remains a topical area and there is an ongoing drive for improvement...
it is important to explain critical judgements and accounting policy choices."
Some trustees still do not like the Statement of Recommended Practice, so the FRC's comments on alternative performance measures are relevant. In essence, if a charity uses another way of reporting its numbers within the annual report, it must show how these can be reconciled with the statutory format.
Don Bawtree is lead partner for charities at accountants BDO LLP