21 Nov 2019 01:49pm

Trust through financial reporting

The reputation of the charity sector has suffered hits from many angles in recent years - including questions on the extent to which you can trust a charity to spend your donation in furtherance of its charitable work

From my professional experience in auditing charities, I can confidently say that in the vast majority of cases you absolutely can trust a charity in how it spends your donation. There are many legal and regulatory checks to ensure this is the case – including a much lower audit threshold (at £1m). But charities do not help themselves when it comes to the quality of their external financial reporting.

Charity accounts have become lengthy and very technical documents. But there is a real opportunity through the trustees’ (directors) report to bring the finances to life and to clearly make the case for how and why a charity spends its funds as it does.

Charity accounts are required to follow the accounting rules and disclosure requirements of the charity SORP. These place a significant additional disclosure requirement on charities that are more akin to the requirements on listed companies. These include a statement on key risks, a remuneration policy, fundraising policy and pay disclosures. This is all right and proper. Charities exist to deliver ‘public benefit’ and get significant tax exemptions and reliefs. With that comes additional the accountability requirements.

But in practice, these additional disclosure requirements have turned charity accounts into bland compliance reports rather than meaningful accountability reports. To counter the reputational hits that individual charities and the sector have suffered, it is time to stop hiding behind boiler plate statements and be more honest and transparent.

The SORP expects charity report and accounts to:

“tell the charity’s story in a fair and balanced manner, acknowledging both significant successes and failures”

One charity – CLIC Sargent – has been widely commended for its openness and honesty in publishing an impact report that sets out exactly this – what it has achieved in the year and where it has failed. But this is in a non-statutory document. These statements would be much more powerful as part of the filed, audited report and accounts.

This principle can be extended to all of the ‘compliance statements’ required by the SORP. For example, there has been much focus on salary levels in the charity sector. Yet the majority of remuneration policies do little to make the case for an individual charity’s pay levels. A statement saying salaries are benchmarked against sector averages does little to help if the reader believes that all charity staff are overpaid.

For example, a hospice has to employ highly experienced medical consultants to delver its end of life care. The NHS does not pay consultants £30,000 – so why should a hospice? The remuneration policy should make this case more robustly.

Different fundraising methods have very different costs. If you rely on charity shops (think High St rents) your fundraising costs will be higher than a charity that relies on legacies. This impacts on a charity’s return on investment and needs clearly explaining in the report.

The SORP encourages charities to report in a way that links the achievements its made – the ‘public benefit’ it delivers – to the resources applied to achieve that. Yet very few reports make that direct link. What is there to hide?

Openness and honesty with a full and frank explanation of how the charity operates will both make charity accounts more informative and help build confidence in the minds of the general public that they can trust a charity to turn a donation efficiently into social impact.

Jonathan Orchar is a partner at Sayer Vincent