Donors who give to charities expect their money to be spent properly. Unfortunately this is not always the case, according to the regulator for charities in England and Wales, the Charity Commission.
In fact, says the Commission, poor accounting and financial reporting practices are common across the charitable sector. Fraud, weak management and bad financial decision-making are all part of a bleak picture painted in its report, ‘Charities Back on Track‘.
Far too often, it is left to amateurs will little knowledge and no supervision to do the book-keeping at smaller voluntary groups. Even large charities can become victim to fraud when manipulative staff and volunteers dupe naive trustees. Well-meaning people who want to see the best in others can fail to properly supervise staff and may miss warning signs of criminal intent or incompetence.
Correcting and preventing bad practice is down to good governance, with a responsibility on auditors as well as trustees to ensure this happens, says the Commission. Dave Walker, its head of outreach and development, explains: “One of the most obvious issues from the [Back on Track] report is the number of instances where poor basic accounting and reporting practices have caused long-term problems for a charity: in some instances even resulting in a breach of the law. We’re very clear in the report that accounting and reporting requirements are not just another administrative burden for charities. In addition to ensuring charities account publicly by showing openness and transparency, they are important tools to help charities balance the books, plan for their future and account for their income and spending. Ensuring they meet their reporting requirements will prove increasingly important for organisations as public scrutiny of charities’ effectiveness grows.”
Above all, says Walker, trustees and advisors must demand that effective management systems are in place. “Good governance is key to all aspects of running a charity but, as the report shows, sometimes the basics are overlooked,” says Walker. “These failures are a common theme through many of the compliance cases we’ve dealt with this year. Good governance arrangements really are the key to running an effective charity. Being clear about roles and responsibilities and ensuring robust financial and risk-management controls are in place is vital for charities if they want to avoid repeating the sort of problems we’ve highlighted here.”
Good practice is a particularly difficult challenge for smaller groups that rely heavily on volunteers. The National Association for Voluntary and Community Action represents local councils for voluntary service, which are made up of small local charities and voluntary groups. NAVCA’s chief executive, Kevin Curley, says that the truth is that bad practice in these small organisations is commonplace.
“Sadly, financial reporting standards in small charities are often low and reflect general problems with their governance,” says Curley. “Far too many charities fail to comply with the reasonable requirement to submit accounts and reports to the Charity Commission. NAVCA members come across local charities which routinely break the rules set down in their own constitutions, often in ignorance. Trustees do not stand down when they should, membership records are not maintained properly, elections are not properly organised, insurances are not taken out to cover new areas of work, data protection rules are ignored, risk management is not undertaken.”
Curley says that the Government’s ‘ChangeUp’ programme, which finances capacity building in the voluntary sector, has been important in improving the way organisations operate. “We need well resourced sources of support and training for small charities in every area, with a particular focus on the needs of charity trustees,” says Curley. “Thankfully, after four years of investment from the ‘ChangeUp’ programme, worth more than £100m, things are getting better. Most areas now have a local infrastructure organisation providing a range of support services and there are more than 100 community accountancy services in England.”
But NAVCA is urging a continuation of government funding for ChangeUp beyond its current funding period ending in 2011. Curley says: “NAVCA wants to see the investment continued until 2014 so that its members can continue to drive up reporting and governance standards.”
The problems faced by smaller charities are recognised by Russell Brickett, the founder and full-time organiser of the Wishes4Kids charity in Leicester, which fulfills wishes for children with severe emotional needs and long term-illnesses. Brickett says that having a nearly full time volunteer who is also a trustee and an accountant by training has been exceptionally important in the charity’s development. “We granted a wish for her son and afterwards she said could she do anything to help,” he recalls. “She could do accounts and we asked her to come in one day a week.” But, instead, she has become almost a full-time volunteer.
Larger charities have a greater capacity to create strong frameworks of controls. Ian Vickers is chief accountant at the Royal National Institute for the Blind and he says that good book-keeping and accounting practices is “part and parcel of the whole picture of making sure fraud doesn’t happen”, an important priority for the RNIB.
Examples, Vickers says, are making sure that all RNIB offices do not merely reconcile petty cash, but also ensure that spending has been approved and that any discrepancies are properly investigated. For street collections, controls include banking money quickly after collection and having the counting of cash witnessed and double-checked. “RNIB is quite dispersed across the country,” explains Vickers. “That means we have offices around the country. So we set standards and practices and check that those are adhered to and, if not, you take corrective action.”
Vickers believes that the Charity Commission is unrealistic in suggesting that all cheques are signed by at least two trustees, which he belives is impractical for a large charity. “But you do mitigate risks,” he agrees. RNIB has a tiered authorisation procedure, with small expenditure approved by one trusted person; larger expenditure by two trusted people; with higher levels of spending authorised by someone at board level.
One of the challenges faced by many charities is reconciling a charitable and forgiving outlook, with an effective and demanding managerial approach. But, as the Charity Commission has stressed, nowhere is good governance of greater importance than in those organisations that seek to make society a better place.
The Charity Commission’s report ‘Charities Back on Track’ can be accessed at www.charitycommission.gov.uk/Library/investigations/pdfs/track.pdf.
Support organisations for charities and voluntary groups include the National Council for Voluntary Organisations (www.ncvo-vol.org.uk/), the Association of Chief Executives of Voluntary Organisations (www.acevo.org.uk) and the National Association for Voluntary and Community Action (www.navca.org.uk). The Charities Aid Foundation (www.cafonline.org/) assists charities by providing low cost banking, investment and fundraising services.
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The Charity Commission’s Back on Track report says that charities must:
have good governance, clear internal controls; and an agreed understanding of people’s roles and responsibilities;
ensure they comply with the Charity Commission’s guidance notes, Internal financial controls for charities and Independent Examination of Charities;
take legal advice before entering into contracts;
have policies to manage any conflicts of interest;
specify how many trustees or other officers must sign each cheque, preferably two;
ensure financial records are accurate, up-to-date and regularly reported to trustees;
ensure signatories never sign blank cheques;
research fundraising offers, including the honesty of fundraisers and the benefits of any arrangements with third parties;
conduct criminal record checks and prevent people convicted of criminal offences from reoffending;
ensure they comply with regulations preventing fundraising for terrorist activities;
ensure that disputes are resolved and do not damage the ability of their organisation to function.