Avoiding what can lead to financial failure
The fallout from the failure of Kids Company manifests itself in the human stories of families and young people left without support they had come to rely on. Whatever your take on what happened to this particular organisation, its demise is a powerful reminder of the responsibilities of trustees, which surely include making sure that the charity has the firm foundations upon which it can fulfil its objectives.
After all, we’ve seen this before with the demise of MyGeneration in 2012, after it lost the support of its donors. As the saying goes, those who ignore history are condemned to repeat it…
The Charity Commission's updated (10 July 2015) guidance on what is expected of charity trustees, The Essential Trustee: What you need to know, what you need to do (CC3), was prompted by a desire in the sector for clarification on the legal obligations imposed on trustees and a better explanation of what the Charity Commission expects of them.
The Charity Commission, set up to oversee charities, used to be well funded and could offer assistance to charities but now that its budget has been drastically cut is far less able to do so. Charities therefore have fewer places to turn to for advice and whilst there is a plethora of information online, it is not always easy for managers and trustees to wade through.
Serious consequences
All charities are regulated and governed by law - get that wrong and the consequences can be extremely serious. For example, charities employing staff need to be aware of employment law, charities providing registered care need to be aware of the requirements of the Care Quality Commission; both must adhere to health and safety legislation.
All charities are, of course, required to comply with financial regulation; without a sound financial platform they will not survive and will not achieve their objectives. Good financial management that provides trustees and management with a "real time" view of the current status is a prerequisite for success.
It would be too easy to simply say that some trustees are recruited for their name and connections, rather than their financial management skills, but ignorance is no defence and they cannot escape their responsibilities to act with prudence. That said, I’ve yet to come across an ill-intentioned trustee and we’d end up with a very vanilla sector if it was run by accountants.
So it’s not for trusteeship to be restricted to accomplished accountants, lawyers, risk managers etc. but for such professionals to equip trustees to spot the issues ahead and manage them.
As we have seen all too often, the human costs of shutting stable doors after horses have bolted are just too high to make second rate financial management acceptable.
Subject to a charity's governing document and any relevant legislation, trustees have a power to delegate a decision they might not feel equipped to make. However, they should always make it clear in any dealings with a third party acting for and on behalf of the trustees that they are acting as an agent for the charity only. They can delegate the work, but not the responsibility.
Ultimately, provided trustees comply with charity law and the requirements of the Charity Commission, ensure the charity does not breach any of the requirements or rules set out in its governing document, and act with integrity and avoid conflicts of interest there should be no cause for the Charity Commission to investigate their actions. However, be under no illusion: it is still possible that trustees may be found personally liable for any debts or losses that a charity may face. Prudence at all times is essential.
Challenging the status quo
Trustees' inductions need to be conducted properly and in person so they are well aware not just of their responsibilities but also how to challenge the status quo. We will all be familiar with the scenario of the dominant CEO or trustee who can make other trustees feel unable to speak up if they feel that something is wrong. In an ideal world they are recruited for their complementary skill sets as much as their motivation and contacts, but few of us operate in an ideal world.
Trustees should be able to demonstrate at all times that the charity is legally compliant and is efficiently run so as to further the charity's purposes.
All charities are required to have a risk register and it is the responsibility of the trustees to keep it up to date. Doing so should alert them to issues on the horizon. Nevertheless, a few pointers will help.
Different charity status
There are, of course, different types of charity status: for taxation purposes only, as a rust, a Community Interest Company, a Charitable Incorporated Organisation and a corporate entity registered as a charitable company, usually limited by guarantee, and required to report under both the Companies Act and Charites: Statement of Recommended Practice (SORP).
For all charities, there are big changes to accounting reporting standards in place for financial accounting periods commencing on or after 1 January 2015, and a well managed charity will have already prepared for this. Unfortunately there are also changes for financial accounting periods commencing on or after 1 January 2016 because the SORP has been updated to reflect this year’s update to FRS 102, the new UK GAAP (Generally Accepted Accounting Practice).
The overarching intention of the reporting changes is to make life simpler, but there will be nothing simple about having to back-track to the beginning of the financial year because you weren’t ready. Far better to embrace the changes now.
Serious incidents
If the trustees know or suspect that the charity may be involved in a serious incident, a report should be made to the Charity Commission as soon as possible. Serious incidents include fraud, theft or the charity losing any of its assets or money; a large donation from an unknown source; links with terrorism; the charity having no policy to safeguard any vulnerable beneficiaries; or suspicions, allegations and incidents of abuse or mistreatment of vulnerable beneficiaries.
Here are some common pitfalls charities have been caught out by over the years:
Not operating a trustee appointment and induction process that works for the charity is a bad pitfall. Many times a charity will appoint a trustee as they are a well known name. However the trustee must either be appointed for their skill set or given the skills they need by induction. On occasion, a charity’s secretary may, quite rightly, send over all the relevant induction documentation for a trustee to read over - but that needs to be supplemented by sitting down and explaining it all in person.
Not actively managing a formal risk register is another risk factor in itself. This might be something that the charity CEO or secretary can put together, but it is the trustees’ responsibility to keep track of it.
Tax status confusion
Misunderstanding the tax status of the charity’s income streams can create chaos and confusion. In the main, activities of a charity are exempt from VAT; charities therefore cannot register for VAT and consequently can’t claim it back. However this can change, for example when a charity sets up a subsidiary business to sell, say, books and clothes.
Care needs to be taken to be clear as to what is business and non business income from a VAT perspective. Trading activities in the course of carrying out a charity's primary purpose.
For example the provision of residential accommodation by a care home charity in return for a payment, or the holding of an exhibition by a charitable art gallery or museum in return for admission charges is called "primary purpose trading" and must be distinguished from other trading income to which an annual limit of £50,000 within a charity applies.
There are also different tax implications for different types of contracts that a charity may undertake, which could be exempt or standard rated or zero rated. It is important to get it right to maximise income from new revenue opportunities. Sorting it out after the VAT man has called is an expensive option.
Cash flow management is a challenge for any business, but a charity has the added complication of matching peaks and troughs in funding with paying for contracted activity. It must be careful to ensure that forecasts are planned carefully. The timing of the funding ideally needs to match with the increased resources and activity needed to complete the contract.
