Trustees need to be better able to spot financial trouble ahead, Charity Commission suggests
The Charity Commission has published new reports aimed at encouraging trustees to act early to spot financial difficulties ahead
On 21st September 2016 the Charity Commission published the results of an internal audit of 94 charities with incomes of over £1 million (combined total income £462 million), deemed by their auditors to be in financial difficulty. After studying their accounts, and carrying out more detailed monitoring and compliance visits with ten charities, the Commission felt that they had identified a number of important insights for charities. These insights include:
· Early action needs to be taken to minimise risks when the prospect of financial difficulty is detected;
· This early action should include considering the possibility of merger or collaboration with other charities;
· The financial outlook for charities remains bleak.
Three thing have prompted these reports. Firstly, the ongoing adverse economic climate; secondly, the high profile crash and burn of certain charities due to financial ‘issues’; and thirdly, the desire of the Charity Commission to be more proactive in its dealings with charities.
Under these circumstances the Commission felt that it was right and proper to issue some updated guidance for trustees with regard to financial oversight.
CC12: Managing a charity’s finances: planning, managing difficulties and insolvency
The main advice here is:
[T]he commission expects trustees to discharge [their] duties by regularly assessing and monitoring the overall financial position of their charity and by taking steps to ensure that its funds can continue to be used for the purposes for which they were given. Where their charity has to close, the commission expects trustees to have planned for an orderly shutdown.
These days, it seems, charities should not underestimate the possibility of unforeseen calamity. The sudden loss of major income streams or a stock market crash affecting investments could, in one fell blow, destabilise an otherwise solid operation. Therefore trustees need to be able to recognise at an early stage when the charity is facing financial difficulties, and understand how to deal with it. Every charity should have a plan for the worst case scenario to ensure that their beneficiaries face minimal risk.
To this end the Commission’s suggestions include that trustees:
· ensure that they regularly receive and consider robust, up to date financial management information
· analyse and review sources of income - dependency on one source of funding can leave a charity vulnerable to increased financial risk and diversification of sources can protect against this
· regularly review planned and proposed expenditure - is there anything that the charity can do more efficiently or could stop doing altogether?
· regularly review risk and reserves policies - the risk policy will identify and update risks that the charity is exposed to, and the reserves policy will set out what reserves are for and when they can be used
The guidance walks trustees through the financial fields they should be looking at and points out where pitfalls might lie and what to do about them. It soberly reminds trustees of their duties:
Charity trustees have a duty to act in the interests of their charity and protect and safeguard its assets. They must exercise proper financial management and compliancy with the law, including insolvency law. The legal position of charity trustees in an insolvent situation varies according to the legal structure of the charity.
The Commission also suggests early and regular consideration of mergers and collaboration between charities as a way to continue or improve the services it offers to beneficiaries (CC34: Collaborative working and mergers: an introduction).
In addition, the Commission points to its 2012 guidance: Charity governance, finance and resilience: 15 questions trustees should ask.
1. What effect is the current economic climate having on our charity and its activities?
2. Are we financially strong enough to continue to provide services for our beneficiaries?
3. Do we know what impact the social and/or economic climate is having on our donors and support for our charity?
4. What is our policy on reserves?
5. Are we satisfied with our banking arrangements and our current and future investment policy?
6. Have we reviewed our contractual commitments?
7. Have we reviewed any contracts to deliver public services?
8. If we have a pension scheme, have we reviewed it recently?
9. How can we make best use of any permanent endowment investments we hold?
10. Are we an effective trustee body?
11. Do we have adequate safeguards in place to prevent fraud?
12. Are we making the best use of the financial benefits we have as a charity?
13. Are we making the best use of our staff and volunteers?
14. Have we considered collaborating with other charities?
15. Are we making the best use we can of our property?
The Commission has been criticised recently for ‘scaring people off from becoming trustees’ by becoming a more ‘weaponised’ regulator, and there has been widespread concern that the Commission’s new warning power could be used as a 'lightning bolt to punish charities'. Nevertheless, the regulator clearly feels it is its duty also to arm trustees with the right information to be able to govern effectively. To that end the updated guidance should be welcomed.
The Commission press release ends with a bleak statistic, that 75% (43 out of 57) of the 94 charities in financial difficulty who had submitted more recent accounts a year later remained in financial difficulty or were no longer a going concern, while a further 9 charities had ceased to operate. With greater knowledge, foresight and a pro-active, pragmatic approach to financial management, the Commission hopes that trustees may be more able to ride the storm and secure better outcomes for their charity and beneficiaries. With Trustees Week coming up (November 7th – 13th) with a focus on ‘Good Leadership’ this is timely advice from the Commission.
Further recommended reading: ‘What makes a good charity’, published September 2016 by NPC’s Iona Joy and Ruth Gripper addresses financial assessment and management in detail: file:///C:/Users/Cat/Downloads/NPC_What-makes-a-good-charity_Final-interactive.pdf