Newsflash: Charity Commission publishes report on tackling abuse and mismanagement in the charity sector

Shortly before Christmas the Charity Commission published a report, Tackling Abuse and Mismangement 2015-16, on the common themes emerging from its recent investigations. Charities should take note of the report as its key findings will likely inform the Commission’s regulatory focus in the year ahead.

Background

The Charity Commission carries out various forms of regulatory work to protect the public’s interest in charities and ensure that charities further their charitable purposes for the public interest. Only a relatively small proportion of registered charities encounter problems warranting a compliance case or statutory inquiry by the Charity Commission. But unfortunately such situations do arise.

Based on the Charity Commission’s casework, its report identifies three key strategic risks facing charities, which the Commission has prioritised in its Risk Framework:

1. Fraud, financial crime and financial mismanagement
2. Safeguarding concerns
3. Abuse of charities for terrorist-related purposes

In addition, the Charity Commission has identified four other themes which have featured widely in its compliance work over the past year and which are of wider interest to the sector:

1. Poor governance (conflicts of interest, private benefit, and decision-making)
2. Charities facing financial distress
3. Fundraising malpractice
4. Non-compliance with registration requirements

Fraud, financial crime and financial mismanagement

Concerns about fraud, financial crime or financial mismanagement featured in a significant number of statutory inquiries, operational compliance cases or monitoring cases resulting in more than 800 disclosures to or from the Charity Commission and other agencies. The Commission identified a few emerging trends in this area which it will likely look to address this year:

1. Most small charities (with an income of £25,000 or less) reviewed by the Charity Commission filed annual accounts or reports which were not up to standard.  Small charities which used the Charity Commission’s templates were far more likely to prepare and submit high quality accounts.
2. Around a quarter of larger charities (with an income of over £25,000) reviewed by the Charity Commission filed annual accounts or reports with major flaws e.g. accounts which did not balance or which did not provide the required disclosure on trustee remuneration.
3. Although charitable incorporated organisations (CIOs) are relatively new, a worrying number are already failing to submit their financial returns to the Commission following registration.
4. A significant number of charitable companies did not file annual accounts because they were in liquidation or in administration.
5. Charities which last declared an income of below £5,000 were more likely to be in non-compliance with their annual returns.

We recommend that charities review their financial controls and procedures having regard to the Charity Commission’s guidance Fraud and Financial Crime.

Safeguarding concerns

Over the year the Charity Commission contacted numerous charities working with children or vulnerable adults to enquire about their safeguarding procedures and policies.

In its report the Charity Commission makes clear that charities working with children and vulnerable adults must carry out DBS checks where required or entitled to do so and must have proper safeguarding procedures and policies in place (including effective whistleblowing procedures) and keep these under review.

In addition, even where work with children or vulnerable adults at risk does not form part of a charity’s core work, its trustees must be alert to their responsibilities to protect from harm all vulnerable individuals with which the charity comes into contact.

Furthermore, charities which fund other organisations whose activities involve contact with children or vulnerable adults should also assure themselves that the recipient organisation has in place adequate safeguarding procedures and practices.

We recommend that charities review their safeguarding procedures and policies to ensure they reflect the current law and best practice.

Abuse of charities for terrorist-related purposes

The Charity Commission assesses the level of risk facing each charity depending on its work and where it operates.  If a charity provides aid in conflict zones, or where terrorist groups operate, these risks will inevitably increase.

The Charity Commission made clear in its report that trustees should be vigilant to ensure that their charity’s facilities, assets, staff, volunteers and other resources cannot be used for activities that “may, or appear to, support or condone terrorist or extremist activities”.  This should be achieved by putting in place good governance and strong financial management and any other procedures required to prevent others from taking improper advantage of the charity e.g. carrying out due diligence on organisations in receipt of funding and monitoring the end use of funds.

We recommend that charities review their governance and financial procedures having regard to the Charity Commission’s guidance Charities and Terrorism.

Poor governance – conflicts of interest, private benefit and decision-making

Enabling trustees to run their charities effectively is one of the Charity Commission’s four priorities set out in its strategic plan 2015-18.  The Commission identified a number of recurring themes in its annual report:

1. Failure to recognise a conflict of interests.
2. Failure to manage a conflict by, for example, not declaring the conflict, not absenting oneself from the relevant part of the meeting, being counted in the quorum and voting on the matter.
3. Making payments or providing other benefits to trustees which are not authorised under the charity’s governing document or by the Charity Commission.
4. Decision-making being controlled in practice by an influential minority of trustees or senior staff
5. Failure to keep proper minutes and other records.

We recommend that charities review their governing document and their decision-making procedures to ensure they reflect the current law and best practice.

Financial distress

The closure of a number of charities during the year, in particular Kids Company, highlighted the importance of trustees managing financial difficulties well and the negative impact the collapse of high profile charities can have on public trust and confidence in charities more widely.

Last year the Charity Commission carried out a review of various charity accounts where the auditors had indicated the charity may be in financial difficulty. Common issues raised by auditors included the on-going challenging financial environment, overreliance on public sector funding, set-up or restructure costs, pension scheme deficits and unplanned overspends.

In its report the Charity Commission set out its expectation that charities should minimise the risk and impact of financial distress. For example:

1. Diversifying income sources, where possible.
2. Putting in place robust policies and procedures to monitor and manage charity finances, including building up appropriate financial reserves.
3. Recognising early signs of financial distress and taking early and proactive steps to deal with the issues (e.g. reducing spending plans, seeking additional income, disposing of capital assets).
4. Obtaining professional advice.
5. If necessary, restructuring or winding up the charity.

We recommend that charities review their financial planning having regard to the Charity Commission’s guidance Managing a Charity’s Finances: Planning, Managing Difficulties and Insolvency (CC12).

Fundraising malpractice

In the summer of 2015, following the death of charity supporter Olive Cooke, charity fundraising came under a period of sustained media and political scrutiny. The Etherington Review subsequently recommended a reformed self-regulatory regime overseen by a new Fundraising Regulator, which was officially launched in July 2016.

The Charity Commission’s report refers to its new revised guidance Charity Fundraising: A Guide to Trustee Duties (CC20), which replaced the 2010 version simply entitled “Charities and Fundraising”. The change of name reflects a shift in focus and greater emphasis on trustees’ own responsibilities in respect of fundraising.

The new guidance sets out six principles which trustees and others involved in charity fundraising should follow:

1. Plan effectively – agree and monitor your charity’s approach to fundraising, reflecting its values;
2. Supervise your fundraisers – this applies to staff, volunteers, commercial partners or professional fundraisers, and the charity’s own trading subsidiary;
3. Protect your charity’s reputation, money and other assets – identify any reputational risks, plan for the resources required, manage your fundraising costs and protect the money raised in your charity’s name;
4. Follow laws and regulations relating to fundraising – identify which laws and regulations apply to your charity’s particular fundraising activities and ensure you have the appropriate agreements and procedures in place;
5. Following the recognised standards for fundraising – refer to the Code of Fundraising Practice and supporting guidance to find out more about the rules and how they apply to your charity’s fundraising activities;
6. Be open and accountable – comply with the accounting framework, be open about complaints, word your appeals clearly and be transparent about the extent to which the charity will benefit.

We recommended that charities which fundraise should ensure that all trustees and fundraisers review the Charity Commission’s new guidance to ensure that they comply with the Commission’s new more stringent expectations.

Please do not hesitate to contact Ian Hempseed (i.hempseed@hempsons.co.uk), Simon Lee (s.lee@hempsons.co.uk) or Chris Hook (c.hook@hempsons.co.uk) if you require further information on the Charity Commission’s report or any advice relating to it.