Charity reporting – implications for breaking fundamental laws
Accountants play a key role in identifying deficiencies in charity accounts.
Earlier this month, one of the most high-profile charities was in the news for not following fundamental charity laws. Upon investigation, the Charity Commission found that trustees of The Prince Andrew Charitable Trust had breached charity law over payments to a trustee, which could have resulted in the loss of public funding of over £355,000.
The Prince Andrew Charitable Trust supported the Duke of York’s charitable work in the areas of education, entrepreneurship, science, technology and engineering. It had an income of around £1.3m a year.
What went wrong?
The Commission identified concerns about a former trustee being paid by the charity’s three trading subsidiary companies as a director of those companies. The former trustee was an employee of the Duke of York’s Household and from April 2015 to January 2020 undertook work for the trading subsidiaries. The Duke of York’s Household was then reimbursed for a proportion of this employee’s time by the subsidiaries after the year end. These payments totalled £355,297.
Trustees cannot be paid to act as directors of a subsidiary company, unless there is authority from the charity’s governing document or the payments are authorised by the Commission or the court, none of which were in place at the charity.
Additionally, trustees failed to comply to act with reasonable care and skill, taking account of any special knowledge, skill or professional status.
The Commission highlighted the other issues of concerns, including:
the charity could not show that conflicts of interest relating to the payments received by a trustee were managed adequately at trustee meetings
there was no standalone conflicts of interest policy at the charity for trustees to refer to
open and fair competition was not conducted before the trustee was appointed to the roles at the charity’s subsidiaries
no evidence was obtained to demonstrate that these payments to the trustee provided value for money for the charity.
As the issue was highlighted by the charity itself following a potential reputational risk arising from significant media coverage of an interview with the Duke of York, The Commission found that resulting action taken by the charity and its subsidiaries was appropriate.
How can accountants play their role in identifying these issues in time?
The Charity Commission has produced CC32 checklist, which provides detailed guidance to support independent examiners. It contains 13 directions which must be followed while carrying out any independent examination. Under Direction 4: Plan the independent examination, it states ‘…in order to plan the specific examination procedures appropriate to the circumstances of the charity, the examiner must review:
the charity’s constitution
the way the organisation is controlled and managed
whether action has been taken on any previous recommendations for improvement
the accounting records and systems
the charity’s structure, its funds and how fund balances changed in the year
the charity’s activities in the year and spending and the financial risks the charity faces.
The general mantra of the Charity Commission is:
‘When in doubt, report it.’
Matters of material significance and reporting obligations
Sections 156 and 159 of the Charities Act 2011 place a duty upon independent examiners of both non-company and company charities to make a report to the Commission where, in the course of their examination, they identify a matter which relates to the activities or affairs of the charity or of any connected institution or body and which the examiner has reasonable cause to believe is likely to be of material significance for the purposes of the exercise by the Commission of its functions listed in section 156(3) of the Charities Act 2011.
There is a total of nine matters of material significance which must always be reported by an independent examiner, which include the following three breaches:
internal controls and governance: Failure(s) of internal controls, including failure(s) in charity governance that resulted in, or could give rise to, a material loss or misappropriation of charitable funds, or which leads to significant charitable funds being put at major risk.
breach of law or the charity’s trusts: Includes single or recurring breach(es) of either a legislative requirement or of the charity’s trusts leading to material charitable funds being misapplied.
conflicts of interest and related party transactions: Evidence that significant conflicts of interest have not been managed appropriately by the trustees and/or related party transactions have not been fully disclosed in all the respects required by the applicable SORP, or applicable Regulations.