A wake-up call for Ireland’s charities

Posted on September 18, 2014 · Posted in Accounting & Business

A series of scandals has rocked Ireland’s charity sector, with evidence of weak control systems at some of the largest organisations. If charities are to demonstrate that they are not contaminated, they may need to review their governance and reporting structures. It seems clear that greater transparency and accountability are essential for charities determined to distance themselves from negative public perception.

 

Rehab and CRC have been at the eye of the media storm, hit by complaints about how they spend charitable money and their executive pay policies. Other charities are now paying the price through a loss of income.

 

The Rehab Group, Ireland’s fifth largest charitable organisation, is an international operation, providing training, employment and social care services.  It was supposedly part-funded by its lottery operation run by a subsidiary company Rehab Lotteries Ltd – ‘supposedly’ because it emerged that the lottery took public money for good causes while doing little more than break-even.

 

Rehab lottery income of just short of €4m generated profits of a mere €9,452. The lottery was burdened by costs of €1.3m and prizes of €2.6m.  The separate Rehab Bingo scheme produced an income of over €3m, but again the profits were small by comparison, at little more than €500,000. As the information leaked out, the government responded by deciding to phase out the Charitable Lottery Scheme.

 

There was also widespread public and political shock about the pay policies at the charity. It was revealed that 12 Rehab senior executives were paid over €100,000 a year, with additional performance related pay to senior executives (though these were waived in 2010 and 2011). The then chief executive, Angela Kerins, was paid €240,000 a year.  As public anger grew, Ms Kerins resigned.  Her replacement will be paid a much less generous €140,000.

 

In all, some 77 Rehab staff were paid over the €65,000 figure at which pay would have been disclosed in the UK under SORP for Charities accounting standards.  Rehab points out that was no requirement for similar disclosure in Ireland – and that most Irish charities have not applied SORP.  Rehab has since committed to use SORP for its accounts from January this year.  It adds that it has reported in line with SORP where it has been required to do so, including for its UK charitable entities.

 

The public focus on Rehab’s operations also led to the revelation that its former CEO Frank Flannery – who was also a senior advisor to Fine Gael – had billed the charity for work connected to its international projects. While board membership was unpaid, board members were entitled to payment for any professional services they provided.  To further complicate matters, Flannery levied charges of €77,000 in 2011 and 2012 in the name of his consulting company, Laragh, that had been dissolved in 2009.  Rehab has since decided that board members will no longer be entitled to payment for professional services provided.

 

Rehab’s chairman until May this year was Brian Kerr, who has now been replaced by Seán Egan, a former CEO of Aviva Ireland. Kerr admitted that mistakes had been made. “We recognise that as a board we have not exercised strict and appropriate oversight of certain issues which have come to public attention in recent weeks,” he said. “The board’s priority now is to initiate a programme of transformation and change which will allow us to candidly confront the issues before us and to rebuild the reputation, staff morale and effectiveness of the organisation.”

 

A review of Rehab is taking place, led by Dr Eddie Molloy, an external change management consultant. Dr Molloy’s remit includes recommending what action needs to be taken to strengthen the board, ensuring the board has the right governance skills, increasing transparency and reforming the structure of the Group.

 

With the charity in receipt of tens of millions of euro a year from the state as well as public donations, members of the Dail’s Public Accounts Committee are taking a strong interest in its operations and governance arrangements.  Continuing enquiries are trying to determine why its lottery operated on such low margins and where the proceeds were spent, but the committee is also examining the cost structure of its state-funded training operations.  This involves a detailed consideration of value for money of Rehab’s services, but also a review of its executive pay policy, including the payment of executive bonuses.

 

Chairman of the PAC John McGuinness explained: “The public want reassurance that state and charity money is being spent wisely and to that end full transparency is in everyone’s best interest.” He emphasised that one of the issues is the confused ethos of an organisation that is part-funded by the state and part-funded by public donations as a charity, yet also operates in part as a business. “Rehab describes itself as a not for profit organisation: it has the status of a charity and it has a commercial wing and the issues around governance and remuneration appear to be at odds with what an organisation of this nature should be about,” said McGuinness.

 

But Rehab is not the only charity mired in controversy over its corporate governance arrangements. There were uncomfortable parallels at the Central Remedial Clinic (CRC), where its chief executive was paid €106,000 from core funds provided by the Department of Health, plus an additional €136,000 out of donations to the charity. The CEO has since been replaced, but only after taking a pay-off costing the charity €742,000.  The new CEO was appointed on a much smaller salary and the entire board has stepped down.

 

Other charities have also been in the news. Ireland’s largest, St. Vincent’s Health Care, was last year called by the Public Accounts Committee to explain its financing and corporate governance arrangements and to provide reassurance on its pension commitments.  This spotlight led to a decision by its chief executive to resign, with new structures adopted for the financing of the CEO position from private income and the separation of the charity’s public and private sector roles.

 

The Irish Red Cross has also been criticised, in its case for its accounting practices. These led to BDO Ireland being reprimanded for a breach of ISA 700 and ISA 260 in its audits of the charity.  Only the accounts of the head office had been audited, with financial irregularities in other parts of the organisation overlooked.  Although BDO had expressed its concerns in management letters to the charity, these were not spelled out clearly in the audit.

 

This series of incidents has severely damaged public confidence in charities. According to research conducted by The Wheel – a national network of 970 charities – almost two-thirds of charities say it has become more difficult to fund raise.  Some half of the almost 300 charities surveyed report a fall in charitable income of up to 10%.  This is affecting charities that have not been subject to any allegations or criticisms.  The Irish Society for the Prevention of Cruelty to Children says it lost around €500,000 in donations last year, because of public cynicism about the conduct of charities.  This year, income is down by 20%, threatening its capacity to support its Childline service.

 

As the CRC scandal unfolded, the Government took steps to improve governance in the sector. The then justice minister Alan Shatter set-up a new Charities Regulatory Authority, which is now operational.  One of its first priorities is to produce a statutory register of charities.  Shatter explained: “All registered charities will be required to provide reports to the Authority each year on their activities and these reports will be made available to the public. This will provide a much needed increase in transparency and accountability in the charitable sector, and will support the good practice in charity governance and management that is critical to a vibrant charity sector that commands the trust and confidence of donors and beneficiaries alike.”

 

But charities would be well advised to review their own corporate governance arrangements, without waiting for the new Authority to act. Ivan Cooper, director of advocacy at The Wheel, says: “For organisations with a charity number, there should be transparency in relation to how all funds are used, regardless of the source of those funds. The entire organisation benefits from charitable status, therefore the highest standards of transparency must apply to the reporting of all expenditure. The trustees of all charities are custodians of public funds, and as such, their default position should always be transparency. Trustees shouldn’t seek to shield their work from public scrutiny by claiming private status.”

 

Diarmaid Ó Corrbuí is chief executive of the Carmichael Centre for Voluntary Groups, which produced the Governance Code for Charities (available at www.governance.ie). He says: “The recent examples of poor governance in Rehab and CRC are a wake-up call for all boards of charities to undertake a robust review of their governance systems and practices. Charities need to aim for the gold standard in best practice for the sector – compliance with the Governance Code for Charities, signed-up to the Fundraising Principles and production of their annual financial statements under SORP for Charities.

 

“This is critical for restoring trust and ensuring transparency for funders and the public. Accountants have an important role in being proactive in helping their charities clients in undertaking this review and in attaining best practice standards.”

 

Accountants will need to consider what action they take when they find a charity they work for or are auditing has been less than transparent and failed to be fully accountable to its regulator and those funding it, suggests Aidan Clifford, advisory services manager for ACCA Ireland. But, he stresses, overall responsibility for good practice must sit with the board and its audit committee, he argues.

 

“Internal audit does the work it is directed to do by the audit committee and any failure in this area is a failure of the audit committee – either by insufficiently resourcing internal audit, directing their attention away from areas of risk, or by ignoring their reports,” says Clifford.

 

“However, should an internal auditor allow their role to be undermined in any way or what recourse do they or indeed any internal accountant have if they suspect wrong doing?  It is a fundamental principal of membership of a professional accounting body that you act with integrity and honesty.  ACCA has a host of resources for members placed in a difficult position at work.  We have lots of FAQ’s and suggested solutions to ethical dilemmas and we always have a technical helpline to allow members discuss their issues in confidence and get assistance on a one to one basis.”

 

In some instances it is not a matter of choice, but of duty for an accountant to take action where there is bad practice in an organisation. This is the time to tackle reporting weaknesses that exist in any charity.