COVID-19: a message from the ICAS Charities Panel to charity trustees and charity staff
The ICAS Charities Panel met recently by video-conference for the first time. Like everyone else, our normal business is largely on hold and we are having to adjust to the new reality of remote working. However, for many charities it will not be possible for all activity to be delivered remotely, with charity staff and volunteers in the frontline of providing services.
We discussed the impact of the COVID-19 outbreak on the sector and committed to sharing our thoughts on addressing the challenges this brings with ICAS colleagues working in the sector. Whether you are a charity trustee or a member of staff, the issues you face are often the same.
“Is the charity viable?” is the central question.
Was the charity financially sound and was there a clear demand for the charity’s services before the lockdown? If so, is there any reason to think that demand for the charity’s services won’t be there after the COVID-19 outbreak? What is the charity’s survival strategy?
Does the charity have adequate resources in terms of staffing, volunteers and funding to see it through the next few months? It is quite possible that for some charities this won’t be the case.
With the charity’s strategy and annual plan disrupted, what are its immediate and short-term priorities? Is it possible to keep the charity’s core activities going? Is the charity likely to have sufficient cash flow? How can the impact of any staff shortages be managed? If the charity can’t keep its core activities going, then what can be done to minimise its outgoings so it can resume its core activities at a later date?
Charities should consider establishing a ‘COVID-19 resilience plan’ to deal with the strategic and financial matters it needs to manage, say, over the next eight weeks to facilitate its survival and over the next six to 20 weeks to manage its recovery.
It’s premature to say that the year is written off: we just don’t know but think about the possible duration of the lockdown.
There could be an effective lockdown for many weeks to come with restrictions beyond that. Therefore, start by modelling the effects of lockdown and make a realistic assessment of the impact on the charity’s activities, with a view to there being greater stability later in the year.
All of this may change, but it is important to begin with realistic assumptions.
Financial and cash flow management
Every charity should have a budget and a cash flow forecast for the current financial year. You now need to re-model both taking a realistic view of the possible timeframe for the lockdown.
Existing sources of funding
Go through each of the charity’s existing sources of funding and model the effects of the lockdown.
Some sources of income, such as events or shops, may be reduced significantly or entirely during the lockdown, but other sources, such as income from committed donors or charitable foundations, may not be impacted much at all, especially if the charity is able to make contact with them and explain why their support remains vital.
For charities holding investments, investment income is likely to be adversely impacted by the COVID-19 outbreak. For example, income from listed investments will be impacted by decisions made by companies about dividend payments in the context of this pandemic.
Make some initial assumptions on the likely scale of recovery in the 12 weeks following the timeframe you have estimated for lockdown.
New sources of funding
Make yourself aware of government backed schemes to assist in managing the situation but be wary of taking on new debt unless the charity is viable and can afford future debt repayments. Interest rates may be low, but debt still has to be repaid in the future.
New sources of funding and support for cash flow are available to charities through government schemes, for example, the Job Retention Scheme (JRS) and time to pay arrangements for VAT and PAYE. Further information about these sources of support and other sources is available via the ICAS coronavirus hub and on the Charity Tax Group (CTG) coronavirus hub.
New sources of grant funding specifically targeted towards the charitable sector are available from charitable foundations and from government. However, arrangements for assessing grant funding applications and to distribute that funding may take time to implement. Funding applications may also take time to complete, including gathering information in support of an application, so some thought will need to be given to allocating resources towards this task. Organisations such as the Scottish Council for Voluntary Organisations (SCVO), the Directory of Social Change (DSC) and the CTG provide up to date information about new sources of grant funding on their websites.
Can you keep your core work going through this period? Can you top up with agency staff (and can you afford them)? Is it necessary to furlough staff? Do you have spare capacity? Can staff be redeployed to administrative, support roles or to prepare grant applications? For many charities keeping a critical mass of front line staff is the number one priority. Also, having more capacity to identify new sources of funding could have a major influence on the charity’s ability to carry on or rebuild after the current situation ends.
Charities and their trading subsidiaries, like other employers, are eligible for the UK government’s JRS for furloughed staff, subject to the detailed rules of the scheme. The scheme has already been extended and may be extended further depending on circumstances.
However, where charity staff are delivering essential services at this time, it may be necessary to draw on the charity’s reserves to pay salaries and wages where normal sources of income have decreased or new sources of funding are not yet in place.
Other than critical essentials, charities should consider deferring their capital programme in its entirety, delaying any discretionary capital expenditure.
Does the charity have to build up stock? If so, certain fundamental supply lines may now drying-up and it may be necessary to secure alternative sources, albeit with longer lead times.
Re-negotiate with the charity’s debtors, if this is necessary but be sensitive to their circumstances, for example, debtors could also be the charity’s beneficiaries or its service users. Redeploy staff to this task and set targets for reducing unpaid debts over 90 days by, say, 50%. Some organisations may not be keeping up with some basic financial management tasks and may not be settling their bills on time. This is critically important, but realism is also required, many organisations are dealing with the same challenges as charities, so where money is unlikely to be received this must be factored into cash flow forecasts.
Be pragmatic about how you handle your suppliers. Most organisations will be willing to re-negotiate terms with at this time. Identify suppliers whose goodwill is fundamental to the charity’s operations and try and pay them reasonably quickly (and if this isn’t possible, then talk to them).
If the charity has a landlord and is struggling to meet the rent, speak with the landlord as soon as possible don’t wait until the next rent invoice arrives. If the charity is a landlord, renting to other charities or for commercial income generation be firm but fair. Judgement will be required to determine whether a tenant is genuinely in difficulties but if a tenant has always been a good payer agreeing a reasonable extension could be in order.
Engage with the bank
Above everything engage with the charity’s bank, be straight with them. Once the charity’s cash flow forecast has been re-run (with no heroic assumptions: there’s no point), then share this with your bank. Have the conversation about how far the bank will support the charity; it might be an informal guarantee to cover your payroll, for example. If possible, obtain a formal commitment to an unsecured overdraft facility for, say, a three-month period (or as long as the cash flow forecast warrants it) but again, be realistic and honest. However, for smaller charities which do not have relationships with a named contact at the bank, it may be better to wait and only contact the bank if the charity is likely to need specific help.
How to cope
Managing charity finances will be stressful. It will be easy to slip into a bunker mentality. Charity finance staff must share assumptions and revised plans with the trustee board and with the auditor or independent examiner and, in the case of larger charities, with the charity’s bank. Consider forming a small group of 2 to 4 trustees to deal with the detail (if smaller charity) or to 2 to 4 executive staff members (if a larger charity).
Professional judgement and skill will be key to generating a realistic financial plan to get the charity through this period; with each week that plans hold, credibility will grow and some semblance of confidence will return. Recognise that with everything changing so quickly, plans may have to be very dynamic and it will be necessary to respond quickly and with imagination to events.
In these challenging times, staff should look after their own mental wellbeing too and should be supported in this.
No elements of charity law have been suspended or amended as a consequence of the COVID-19 outbreak and the duties of trustees remain unchanged. Trustees should continue to act in accordance with their charitable purposes and the interests of the charity should remain paramount in relation to any decisions made during this time. This includes protecting charitable assets and safeguarding vulnerable beneficiaries. There is also an increased risk of conflicts interest arising or inadvertent breaches of law and regulation at this time, so trustees should remain alert to these.
Trustees should be mindful of any governance issues that may arise due to their legal form (for example, from being an unincorporated association or company limited by guarantee) or any other sector specific legal or regulatory requirements which may apply (for example, charities operating in the care sector).
Trustees should also be mindful of governance requirements for annual general meetings and find out now what flexibility can be built into the normal calendar of events. Planning ahead will avoid last minute breaches of the charity’s constitution, articles of association or founding document.
Look out for guidance issued by the relevant UK charity regulator on AGMs and take legal advice if necessary.
The well-worn saying of ‘”fail to plan and you plan to fail” has never been more apt but above all planning collaboratively, with transparency and honesty, is paramount.
Audit and independent examination
Many charities will be approaching their annual audit visit or independent examination and this may be another source of anxiety. Charities may be concerned about not being fully prepared for their annual audit or examination visit when it normally takes place. They may be worried about how the external scrutiny process can be undertaken remotely.
However, early discussions with the charity’s auditor or independent examiner about the best way to approach the external scrutiny and accounts production process will help address concerns. For example, charities may be surprised about some of the innovative ways auditors can verify the stocktaking process without being on site or the perform much of their work remotely.
All of this is constantly evolving but it will be inevitable that some charities may need to have robust conversations with their auditor or examiner about the existence of material uncertainties relating to going concern. For both charities and their external scrutineers, if there was ever a time for measured professional judgement, it is now.
It is vital for charities to be transparent about the effects of the COVID-19 outbreak on their activities with the auditor or independent examiner and about what steps are planned to mitigate the risks to the charity’s services and beneficiaries.
For charities preparing their accounts in accordance with the Charities SORP (FRS 102), trustee boards should expect very robust scrutiny of their going concern assessment. Going concern considerations will be paramount during this time.
For charities preparing receipts and payments accounts, consideration by the trustees of their financial sustainability will also be essential and will be the subject of scrutiny by the independent examiner.
Auditors and independent examiners will expect the trustees’ going concern assessment, which needs to cover at least 12 months from the date of signing the financial statements, to take into consideration the existing and potential effects of COVID-19 on the charity’s activities and therefore cash flows. Ultimately, auditors and examiners will want to see that the trustees have considered whether there is a material uncertainty relating to going concern.
Auditors, for example, will want to see the charity’s revised cash flow and revenue forecasts and will test the reliability of the trustees’ assumptions. Did the charity meet its revised forecasts over the lockdown period? How sensitive are the forecasts to changes in assumptions, including the charity’s worst case scenario? Auditors will expect charities to update their forecasts regularly until the accounts are signed off.
Impact on trustees’ annual report and accounts disclosures
The impact of COVID-19 will impact on the narrative disclosures in the accounts, in particular on disclosures about the basis of preparation of the accounts, critical accounting estimates and judgements in the accounting policies, and events after the reporting period.
Charities should be prepared to revise disclosures about events after the end of the reporting period up to the point the trustee board approves the trustees’ annual report and accounts and the auditor or independent examiner signs their report.
The trustees’ annual report will also need to reflect the impact of COVID-19 on the charity and be consistent with both the numbers and the narrative disclosures in the accounts. Updating the charity’s principal risks and uncertainties in the trustees’ annual report will be essential.
Reporting matters for the auditor and independent examiner
If there is a material uncertainty relating to going concern disclosed in the accounts, the auditor or independent examiner will refer to it in their auditor’s or independent examiner’s report.
Where a paragraph is included in the auditor’s report about a material uncertainty relating to going concern (classified as an emphasis of matter paragraph), the auditor’s opinion is not modified in this regard. Where a material uncertainty is referred to in the independent examiner’s report it is considered to be a qualified report: an examiner does not issue an opinion on the accounts.
In normal circumstances, the UK charity regulators consider a modified auditor’s opinion, an emphasis of matter paragraph or a qualified independent examiner’s report to be matters of material significance. These give are deemed to give rise to a statutory duty for the auditor or examiner to make a separate report to the relevant charity regulator.
However, guidance for auditors and independent examiners in Matters of material significance reportable to UK charity regulators includes a section on reporting in times of national emergency. While the duty to report remains in place during times of national emergency, the guidance states that:
“….where a modified opinion, an emphasis of matter, or a matter identified by the independent examiner is solely due to the exceptional circumstances of the national emergency affecting the conduct of the audit or the independent examination then this is not considered to be reportable as a matter of material significance to the charity regulator.”
N.B. Our interpretation of a matter identified by the independent examiner in their report is that this is a qualified report in the context of the guidance on matters of material significance reportable to UK charity regulators.
The key words in the guidance are “….affecting the conduct of….”. The guidance therefore means that a COVID-19 related impact which is referred in their external scrutiny report could still result in the auditor or independent examiner having a duty to report.
However, the UK charity regulators are committed to responding to such reports in a proportionate manner.
Charities which have debt funding or rely on grant funding need to be aware of the impact a modified auditor’s opinion or emphasis of matter paragraph could have on banking or loan covenants or on funding applications.
Delays in completing trustees’ annual reports and accounts and annual returns may be unavoidable, either because of going concern issues and/or because the timing of the external scrutiny is impacted. Both OSCR and the Charity Commission for England and Wales have recognised this in recent statements. Also, auditors and some independent examiners will have developed their own risk management arrangements around the signing of external scrutiny reports and may well not sign these prior to statutory deadline.
Find more information on the impact of coronavirus below: