Top 10 accountancy challenges for charities
Jandy Stevenson considers the pressing issues facing the not-for-profit sector.
Those in the third sector are continuing to face mounting challenges as they strive to do their best to assist the causes they support. The word "austerity" is still very prevalent when matters concerning the charity sector are raised and the likelihood of ongoing restrictions being imposed on public sector spending means that the burden being borne by many charities will probably increase rather than decrease. However, by recognising where the key challenges lie it is possible to prioritise actions and optimise available resources. The charity team at accountants Henderson Loggie, in conjunction with their colleagues in the MHA network of independent UK accountancy firms, has identified the "top 10" issues currently facing charities and organisations in the not-for-profit sector.
1. New Statements of Recommended Practice (SORPs)
These came into force on 1 January 2015. One is to support the Financial Reporting Standard for Smaller Entities (FRSSE) and one to support the Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS 102). Charities of a size eligible to choose need to consider carefully which SORP to follow, particularly as the FRSSE is likely to have a short lifespan and following it initially may well lead to more change in a year or two.
2. Operating a charity trading subsidiary
Commercial trading activities of charities require careful consideration in order to avoid difficulties. Generally it is advisable to undertake these activities within the charity itself, taking advantage of exemptions available under charity and tax law. Where exemptions are breached, however, it is appropriate for activities to be undertaken through a wholly owned trading subsidiary. While this is a tried and trusted structure that has long been accepted by the Office of the Scottish Charity Regulator (OSCR), The Charity Commission and HMRC, there are some significant challenges to be overcome.
3. Managing risk
There is a requirement for trustees of charities over the audit threshold to include a risk management statement in their trustees' annual report. In order for trustees to make this positive statement they will need to consider risks and their management in a formal way. The new SORPs reinforce the importance of the risk management statement. To effectively manage the risks of the charity trustees will require a framework, which will enable them to identify and categorise the risks facing the charity, and to make decisions about how to respond to these risks.
4. Avoiding conflict of interest
Trustees' duty of compliance requires integrity and the avoidance of any conflicts between the charity and personal or professional interests. This includes perceived as well as actual conflicts of interest. According to law they cannot receive any benefit in their capacity as trustee unless they have express legal authority covering this. It can be quite challenging to do so but trustees must aim to identify conflicts of interest at an early stage and manage them appropriately.
5. Ensuring delegation processes are fit for purpose
The board has ultimate responsibility for the organisation but it cannot run it on a day-to-day basis. Delegation is, therefore, crucial but for this to be successful it needs to involve a clear structure and terms of reference to ensure everyone involved understands their roles and individual responsibilities. Failure to review delegation processes can lead to operational problems and governance issues.
6. Determining the appropriate level of reserves
Significant reserves would begin to suggest that resources are being stockpiled and not applied for the charitable purposes for which they were received. However, to operate with nothing in reserve might be considered foolish and reckless. The charity must have a reserves policy, and a well-crafted and thought-through reserves policy can pay dividends by facilitating development of the organisation and its activities, assisting in strategic planning, providing a buffer to manage unforeseen financial difficulties and to demonstrate good stewardship to funders.
There are a number of reasons why charities can be susceptible to fraud. These include the fact that a high level of confidence in the sector means people think it very unlikely; there can be a lack of strong controls – either because of limited resources or overreliance on the good will of employees or volunteers; and reliance on a large number of volunteers. It is essential that trustees understand the risks to which the charity is exposed and where it might be vulnerable to fraud risk, and make sure that controls are designed accordingly and that proper training is given to trustees and staff.
By 2016 every organisation in the UK, including charities, must make pension provisions for their employees. It is important to know your staging date and make plans in good time.
9. Gift Aid
This can "gross-up" donations by 25 per cent but the charity must ensure the system is correctly administered and does not fall foul of HMRC's rules.
This can present a series of challenges and complex issues. Charities must keep on top of matters such as exemptions and obtaining the reliefs available to them in order to be VAT efficient.