What is the threat?
There’s no doubt that cyber security is a significant threat to all charities. Despite this, a typical charity only spends a quarter of what a similar size business would spend on cyber security. A successful cyber-attack can leave a charity open to blackmail and ransom demands and can result in financial losses and reputational damage.
The Charity Commission has highlighted concerns over the level of fraud and mismanagement in the charity sector.
Trustees have overall responsibility for governance and for safeguarding the charity’s assets. Trustees should therefore be alert to fraud, understand what it is and how it may affect the organisation.
What are internal controls and why are they important?
Trustees have a duty to safeguard charity assets and to make sure resources are used wisely. A good system of internal controls is key to this. Sound internal controls can reduce the risk of loss through theft, fraud, bad decisions or error.
How long has it been since your last review?
In many charities, internal controls are well documented.
Following the end of election purdah restrictions, the Education and Skills Funding Agency (ESFA) has issued its annual revision to the Academies Accounts Direction (AAD) 2016 to 2017, which will determine the format of accounts prepared by Academy Trusts for the year to 31 August 2017.
The changes noticed by most trusts will be limited, but there are additional disclosures and clarifications for trusts with specific circumstances.
Communication with the outside world has never been more important. Making sure you successfully communicate what you are doing and the difference you make to your beneficiaries can mean the difference between future funding being awarded or not. You should communicate not just how funds are spent, but the impact it has, that is, the public benefit you deliver.
Charity trustees have well known duties of stewardship, which means ensuring that resources are used for charitable purposes and are not put at risk unnecessarily. There is also, of course, a duty to use them effectively. Three areas to consider are:
Remember the case of the Bank of England investing in the payday lender Wonga? Charities might be encouraged to consider an ethical investment policy, so investments don’t compromise the aims of their charity.
Charities are certainly adapting to changing funding environments. In seeking to reduce reliance on grant funding, many charities have looked to increase enterprise trading and charging for services. But the tax impacts of developing new opportunities and even delivering the same services under different arrangements have sometimes been overlooked – these need to be on a charity’s radar.
There has been a significant change in the focus of the Charity Commission’s guidance on reserves (CC19 – revised in 2016). The new key messages include underlying steer towards keeping reserves to address risks of ‘unplanned closures’ and to plan for the maintenance of essential services. This is a turnaround from having to justify why reserves are being retained, to requiring an explanation as to why they are adequate.
Consider a charity which delivers services that are funded through a blend of contracts and grant income. To comply with the Charity Statement of Recommended Practice (SORP), the year end accounts need to recognise income from service contracts to the extent that the service had been delivered, whereas grant income would generally be recognised at the point that the grant was receivable.
Making Tax Digital – charities exempt but trading subsidiaries will be affected
The Government has confirmed that it will introduce legislation to exempt charities from the Making Tax Digital requirements. This is welcome and will protect smaller charities and those with limited digital capability.