Charity Commission Responds To Audit & Corporate Governance Consultation

The Charity Commission (the Commission) has responded to the Department for Business, Energy & Industrial Strategy (BEIS) consultation on restoring trust in audit and corporate governance.

Whilst the Commission is supportive of the Government’s objective to strengthen the UK’s framework for major companies and the way they are audited, it does not support the extension of this framework to the charity sector and does not recommend that charities are included within the definition of “Public Interest Entities” and associated corporate reforms.

Existing charity governance and reporting framework

The current charity framework consists of charity law, Charity Commission policy and guidance and in terms of charity reporting and accounting (the Charities Statement of Recommended Practice (SORP)). Charitable companies are also subject to provisions of company law in respect of the duties on directors, accounts preparation and audit. This is supplemented by good practice sector guidance and, in particular, the Charity Governance Code and the oversight of fundraising by the Fundraising Regulator.

The SORP applies to charities preparing their accounts in accordance with the Financial Reporting Standard applicable in the UK (FRS102). The Commission is the joint SORP-making body and the SORP-making body is recognised by the Financial Reporting Council. The SORP provides sector-specific guidance for charities on how to apply the Financial Reporting Standard (FRS102).

Due to the public interest, charities presenting the SORP includes charity specific requirements that are additional to those of FRS102. In particular, additional requirements relate to the trustees’ annual report and additional disclosures aimed at providing a high level of accountability and transparency to donors, funders, financial supporters and other stakeholders. The next SORP is currently in development and there is an opportunity to feed into this development. Insofar as the proposals look to introduce new reporting requirements, enhancing the SORP would mean that these requirements could be modified to be relevant to charities.

Two forms of external scrutiny can be carried out on charity reports and accounts, being, audit and independent examination. Both are tailored to the charity sector and the professionals providing the services to charities are subject to a legal duty to report certain matters of material significance directly to the Commission. The thresholds for audit are significantly lower in the charitable sector due to the public interest, this, in turn, brings more oversight and assurance.

The Commission requires trustees to report serious incidents to the Commission. This is a legal requirement in submitting their annual return and there is guidance detailing what such matters should be reported.

Both the auditor and examiner reporting regime and the serious incident reporting enables the Commission to be sighted on risks and issues and this enables the Commission to assess issues and engage with charities as necessary. This reporting is over and above what is required in the private sector and the powers intended for the new Auditing Reporting and Governance Authority (ARGA).

The Commission has published guidance concerning risk and reserves and would highlight that charities are already currently subject to additional reporting requirements under the Charities SORP in terms of financial review, risk reporting and reserves reporting. This reporting is over and above what is required in the private sector. Insofar as the reforms envisage a discussion of distributable reserves, the Commission’s guidance already covers this matter.

The Commission has regulatory powers in place that are provided in the Charities Act 2011. The powers include but are not limited to:

  • Trustee disqualification;
  • Trustee suspension;
  • Trustee removal;
  • Official warning:
  • The appointment of interim managers;
  • Directing orders; and
  • Information-gathering powers.

These powers are far-reaching, effective and are used to deal with wrong-doing and harm. Although the new ARGA will be an expert in corporate reporting, it lacks the required knowledge of the duties of trusteeship, charity law and the experience of the sector to effectively oversee charities, such is expertise already found in the charity regulators in the UK.

The Commission’s position

The Commission believes that the existing framework is fit for purpose for the charity sector and in many areas has been developed in consultation with the sector. To introduce a new framework for charities will increase the regulatory burden for the sector with cost implications that will impact the sector without any assurance that the framework will deliver the enhanced assurance desired.

The Commission would instead like to invite BEIS to work with it and the charity sector as well as stakeholders to take account of the existing mechanisms within the charitable sector which could be improved to meet the Government’s objective of a strengthened audit and corporate governance framework.

How can we help?

For further information or advice on the subjects discussed in this article, please call a member of our Corporate Services team in Derby, Leicester or Nottingham on 0800 024 1976 or contact us via our online form.

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