Focus: Finance and Governance - Outlook - Small charities are over-regulated

Peter Gotham is chair of the Charity and Voluntary Sector Group at the ICAEW and a partner at accountancy practice Gotham Erskine. He writes in a personal capacity.

Charities often have a problem persuading people to act as treasurers or even as trustees. The fear of excessive regulation, as well as the perceived risk, forms a large part of the reason for this reluctance.

These regulations are disproportionate to the risks they are meant to help manage.

Commercial companies do not need an audit unless their turnover exceeds £5.6m - and audits and other regulations are increasingly assuming matching infrastructures. In the charity sector, funders of even quite small organisations need to protect their funds and Sorp-compliant accounts, and an audit is seen as the primary manner in which this is done. In this case, how can the Charity Commission justify the increasingly specific rules it imposes?

We do need transparency, and the commission gives very useful guidance on good practice. But to bring the full panoply of the Sorp in at the proposed threshold of £500,000 is over-prescriptive. Reduced requirements for small charities do not reduce the regulation significantly.

The Sorp should start with what is necessary for small charities. The good practice represented by the bulk of the Sorp should be just that - good practice, but not obligatory for any but the largest charities.

If this rule was applied to those over the £5.6m threshold, it would cover nearly 60 per cent of the sector in terms of income. Thousands of charities would benefit from the reduced costs of compliance.

In 2004, the Charity Commission reported that many of the largest charities complied only patchily with the Sorp. The commission's accounts campaign is trying to improve the timeliness of accounts production, so why raise the bar and expect even small charities to comply?

Unnecessary red tape puts off potential trustees and distracts those in post from more important work. Having been advising and auditing charities for 30 years, I consider the key aspects of the reporting regime to be restricted fund accounting, risk reviews and reserves planning. These represent the trustees' duties to safeguard assets and report on the use of trust funds, as well as assessing where the charity is and where it is going. Surely these are more important than matching 'functional headings' of income to expenditure, which in many cases are a set of purely artificial figures prepared only for the statutory accounts.

Government initiatives such as the Compact Funding Code and the Better Regulation Task Force show a willingness to address the issue of over-regulation - but there is a long way to go.

KEY POINTS

- Charities struggle to attract treasurers because of the fear of excessive regulation

- Good practice advised in the Sorp should be obligatory only for the largest charities

- Reporting regime should include restricted fund accounting, risk reviews and reserves planning.

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