Don Bawtree: A new governance code for Scotland

Plus: potential changes to ethical and auditing standards; pay gap reporting; an independent review of tax; international working; and two cases of interest

Don Bawtree
Don Bawtree

The Office of the Scottish Charity Regulator has promoted on its website the new Scottish Governance Code for the Third Sector, which charities are encouraged to apply. This now makes three different codes applying to general charities in the UK. The new Scottish code has five core principles: organisational purpose, leadership, board behaviour, control and effectiveness. The recently revised code in Northern Ireland also has five principles, although they are subtly different. Meanwhile the Charity Governance Code applied in England and Wales has seven such principles. It is unclear whether charities operating across the whole of the UK now need to demonstrate application of all 17 different principles when these are referred to within the annual report.

Audit

The Financial Reporting Council has issued a consultation that proposes changes to the UK’s ethical and auditing standards. The FRC proposes to set more stringent ethical rules for auditors, in response to findings from recent audit enforcement cases and from audit inspections. The focus of the proposals is on auditors being, and being seen to be, properly independent, as well as on greater transparency around what is considered material in a set of accounts. The proposals come after findings arising from the FRC’s most recent survey of audit quality, focused on quoted companies. There continue to be concerns about how strongly auditors challenge management, familiarity with the organisations being audited and considering the audited as "the client" for the auditor. The FRC wants audit firms to change this mindset and think more of the shareholder or investor. Although the findings and recommendations relate to listed companies, charity trustees will want to ensure that their own auditors are suitably independent and focused on quality.

Pay gap reporting

Employers with more than 250 employees are required to report data on the gender pay gap in their organisations, and often this is included in annual reports. The National Council for Voluntary Organisations reports that 571 charities have reported this information, perhaps disappointingly noting that voluntary disclosure at 4 per cent runs at the same rate as commercial organisations. The overall message is that the gender pay gap in charities is much lower and women are more represented in the top pay quartiles compared with other types of employer. However, in general charities – what most people think of when they talk about charities – the gap is nearer 2 per cent.

Tax review

An independent charity tax commission supported by the NCVO has published its report, making recommendations across the spectrum of taxation that touches on charities. Having been determined to be fiscally neutral, the proposals are not fundamental and will hardly be top of the current government’s to-do list. One eminently practicable proposal is for public bodies to state their understanding of the VAT status of agreements, introduced with a touch of meiosis: "Decisions on whether funding relationships are contracts or grants for VAT purposes can be highly subjective and open to interpretation."

Working internationally

The Charity Commission has reminded the sector that charities working internationally can face risks because of their operating environment. This includes the application of financial sanctions, greater levels of corruption or criminal activity and the presence of terrorists, proscribed groups or designated entities.

When charities apply money and resources overseas they should take extra care, using the Charity Commission’s toolkit. This includes a helpful list of examples where Pestle analysis would have applied to developments during 2019, helping charities to decide how to manage resources and people. Alternatively, the list provides a depressing litany of why charities are still needed internationally: Political – Sudan: civil and political unrest; Economic – Venezuela: seven million people needing aid; Social – Yemen: large spike in cholera cases, especially in children; Technology – Sri Lanka with its social media channels closed after the recent bomb attacks; Legal – Brunei, where sex between men has become punishable by death by stoning; and Environmental – Mozambique, where two cyclones left at least 1,000 people dead.

Cases of interest

There are two recent cases of interest reported by the Charity Commission that have financial implications. One is on 72 RAF mess charities after a fraud at RAF Honnington. The report indicates the need for trustees to understand exactly what their role is within a charity, even when it may be an ex-officio type appointment, and to take responsibility for ensuring there are proper systems of internal financial control.

Meanwhile, on 26 June 2019, the administrator of Chabad UK was convicted of laundering money through certain charities, as well as for supplying false information to the commission. The Charity Commission is investigating a number of charities in connection with this case, which appears to have included the supply of erectile dysfunction medication to overseas customers. Trustees are reminded that, despite the great good done by charities, the sector is vulnerable to abuse and some due diligence should always be undertaken when working with partner organisations.

Don Bawtree is lead partner for charities at accountants BDO LLP

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