Transparency is more important than ever in the UK’s charity sector

Originally published by AAT.

Figures compiled by market researcher Populus show that public trust in charities hit a record low last year.

Participants in the survey cited negative media stories and a lack of knowledge of how charitable organisations handle their finances among the reasons for their diminishing trust.

A number of high-profile financial scandals have affected the charity sector in recent times. In 2015, children’s charity Kids Company closed its doors amid reports of financial mismanagement and unpaid wages. Two years earlier, the BBC’s Panorama team found that Comic Relief had invested in funds holding shares in alcohol, tobacco and arms firms, demonstrating the care not-for-profits must take in handling their finances.

To regain the public’s trust it’s essential for charities to maintain clean financial records and to enlist the right help in preparing their accounts for scrutiny.

“Any charity donor wants the reassurance that their money is being properly applied,” says Jonathan Orchard, partner at Sayer Vincent, a London-based accounting firm that works exclusively with charities, social enterprises and not-for-profits. “Confidence in the sector has taken a knock in recent years. Knowing that accounts are put together by a properly qualified accountant is one way of restoring that confidence.”

Clearing the practical hurdles

Preparing accounts for charities is very different from working with for-profit enterprises. An accounting firm engaged by a charity must be ready to comply with a separate set of financial regulations: in the UK charities have to prepare their accounts in line with the statement of recommended practice (SORP) issued by the Charity Commission and its devolved equivalents in Scotland and Northern Ireland.

“The biggest difference is the need to separate what the SORP calls restricted funds from unrestricted funds,” Orchard says. “If a donor gives some money for a particular project, or to spend in a particular area, that money has to be spent on those purposes under charity law. The charity has to show that this money is separate from other donations which are freely given to the organisation.”

Additionally, charities are required to have their accounts examined or audited. According to the Charity Commission guidelines, a full audit is required if a charity’s income exceeds £500,000, while an independent examination is necessary for smaller not-for-profits with incomes between £25,000 and £500,000.

In contrast, commercial businesses in the UK can be exempt from audit if they meet two of these three criteria: annual turnover of less than £6.5m, assets worth less than £3.26m, and 50 or fewer employees.

Mark Heaton, director of KM Chartered Accountants, a Burnley-based firm with more than 70 charity and not-for-profit clients, says added red tape is a small price to pay in working for a good cause: “This sector is interesting because all charities are different, whereas the accounting process for most businesses tends to be very similar. If you’re good at what you do, you realise charity accounting is not as easy as it looks. The sector is heavily regulated.”

Recognising the sector’s differences

Government cuts to the voluntary sector mean that small and medium-sized charities face increasing funding challenges. When austerity measures hit in 2009–10, charities began to experience income reductions from government bodies. Funding hit its lowest point at £14.5bn in 2012–13, before rising by £500m the following year.

Over recent years, there’s been a growing divide in the funding larger charities receive compared to smaller ones. According to data from the National Council for Voluntary Organisations, charities with incomes of more than £100 million have disproportionately been shielded from cuts. As budgets shrink for most charities, Orchard says it’s important to focus on delivering services rather than staffing finance departments.

“You’re dealing with an under-resourced or an overstretched finance function, and you’re dealing with additional disclosure and reporting requirements,” Orchard explains. “Put those two things together, and you often get drawn into providing more support than you might for an equivalent company client.”

Working with charities is a unique challenge for accounting professionals. It takes mastery of an extra set of regulations and an understanding of the challenges facing charitable organisations. Accountants with these attributes will be indispensable as not-for-profits seek to stretch funding and rebuild the reputation of the charity sector. Firms that take on charities as clients may have to put in a bit of extra time and effort, but for many professionals, knowing they’re working for a good cause makes it all worth it.

“You’re dealing with trustees and staff of clients that are working on the frontlines of different issues,” Heaton says. “That’s its own reward.”

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