Small Charities Bulletin July 2015

 Read the July 2015 edition of our quarterly update for small charities:

Contents


Introduction

Kelly

Welcome to CFG’s Small Charities Bulletin, a collection of articles and advice specifically aimed at smaller organisations.

CFG are keen to support and work with small charities wherever possible: doing so allows us to better understand the issues facing smaller organisations, and helps us to ensure that your views are represented when we’re talking to policymakers and officials.

We’re particularly keen to hear feedback from small charities on the Gift Aid Small Donations Scheme. We are gathering feedback on this under performing scheme – further details are below in our policy update. In this update, Andrew O’Brien, CFG’ s Head of Policy, also talks through our proposals for improving business rate relief for charities. Business rates are currently worth over £1.5bn to the sector, and are critical for small organisations.

This quarter’s issue also includes a range of practical advice for smaller charities on all things financial. Features this month include tips on preventing fraud, including things to look out for and the simple steps you can take to minimise risk. We also have advice on how to choose the right insurance provider, and information about changes to audit thresholds and the options available in light of this.

We are keen to hear your thoughts on this bulletin, suggestions for topics to cover, and opinions on format or frequency. Please email me with any feedback.

For more information and tips on other topics such as pensions auto-enrolment, SORP and the reporting and accounting changes, take a look at our previous editions of the bulletin, which can be accessed here.

Kelly Ventress, Communications Manager, CFG


Audit or independent examination?

In light of recent changes to audit thresholds, John O'Brien from Community Accounting Plus discusses the options now available, and things you should consider.

So we have now received the good news for smaller charities, the audit threshold has increased to £1m.Some of you may remember the old days (pre 1992) when there were no rules. I seem to recall a 2 page SORP from the early 1980’s – yes it really was 2 pages long - but the Charities Acts of the early 1990’s, as well as bringing in a degree of consistency, also brought us the Independent Examination (IE).

The Charity Commission know the issues around confidence and risk and balancing this with the cost saving. IE is an option and there may be good reason to stick with the audit. So before you rush to cancel the audit, it’s worth taking time to ponder.

You need to consider:

Your own rules
You must follow your rules. Hopefully they are written in such a way as to allow for audit or independent examination. If they are old enough (before the 1991 Act) then even if you only use the word ‘audit’ this is not binding and an IE is possible. But if your rules are more recent and you say you will have an audit then so be it. You’ll need to change them if you want an IE.

What do your funders think?
Check whether any funding or contractual conditions state that an audit is required, as you may be required to have audit. Even if not, you may find that your funders would not be happy if you go for an IE rather than an audit as they may want an additional level of assurance.

Public confidence
You ought to ask if not having an audit would reduce public confidence in your management of the charity. Personally, I am not sure if it has an impact (how many contributors to appeals like BBC Children in Need read the accounts before phoning the BBC?). That said there may be some who check and rely on the charity’s audit report, so bare this in mind.

Costs
Last, but not least, an Independent Examination should cost a lot less than an audit. As a very rough guide, I’d expect an audit of a £1m charity to be around £3-4,000. An examiner may charge up to £1,500. That means an extra £2k or so to do more charitable activity.

My advice
Before you decide, check your own governing document and consider the issues above. Then have a discussion with your auditors. There may be special circumstances within your charity that suggest that an audit would be wise, or your auditors themselves may provide the IE service. I think this is a good move for many charities, but just take a moment before you change…

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Be prepared: preventing fraud in charities

Kate Sayer of Sayer Vincent considers some of the most common types of fraud in charities and how they can be prevented.

It’s sad to see reports of fraud in charities in the press – I suppose the only good thing is that the fraud has been detected.

The incidence of fraud has been increasing and charities are no exception. Charities are a target for fraudsters in a number of ways.

Charities report regular cyber attacks and other sophisticated methods involving hacking, credit cards, stealing bank details and more. Some of these attempts are really not so sophisticated though.

Take the example of the would-be thief who created a standing order form using the bank details he found on a charity’s website. His attempt to pay himself a regular amount was thwarted because he forgot to complete the payee details.

Charities want to make it easy for volunteer fundraisers to give them funds, but make sure you publish only the details of an account that is not used for expenditure. That way, it will be obvious if unauthorised withdrawals are being made.

Some frauds are quite audacious and yet quite simple. It is common for a building company that might be undertaking work on your premises to put up advertising hoarding to announce their presence. Fraudsters have been contacting the client (often a school or university) to advise them of a change in bank details for the building company. A neat way to divert funds that would probably not be detected for some months.

More often, however, fraud committed in charities is internal, just as it is for any other organisation.

The most common fraud is to create a bogus supplier (or two) and then slip a few invoices in for payment. This is most commonly perpetrated by finance staff and it is apparently possible for this to go undetected for years. It is a simple fraud that depends on managers not actually checking invoices when they approve them but signing them off anyway.

So how strong are the controls in your organisation?

Authorisation feels like it ought to be a strong control but in practice it depends on the time and energy of the individual charged with the responsibility. Ironically, this duty is likely to be discharged more diligently by a more junior member of staff.

The most important control your organisation can introduce is a strong culture that fraud is not acceptable and that it is OK to report any behaviour staff may consider to be unusual or out of the ordinary. Charities can play a strong hand here – stealing from the charity means that the money is not going to a good cause.

A strong sense of values and commitment to the cause will create the right culture. It is also important though that the leadership of the charity sets the right tone – trustees and senior staff must follow the rules when it comes to claiming expenses and getting purchases authorised. If the leaders of the charity go round the system, why shouldn’t others too?

Sayer Vincent is leading a one-day training course for CFG on ‘Good controls and preventing fraud’ in London on 8 September 2015. Find out more at www.cfg.org.uk/events.

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Small charities policy update

Andrew

Andrew O'Brien, CFG's Head of Policy, outlines some of the key issues for small organisations.

Small charities are particularly sensitive to changes in the policy landscape, with a few small changes potentially have a big impact on small charities on the ground. CFG seeks to represent the interests of small charities on finance issues, working with Small Charities Coalition and other bodies to make sure that their voices are heard.

Three issues have come up which are of relevance for small charities this quarter: business rates; pension reform and Gift Aid Small Donations Scheme.

Business rates are worth over £1.5bn to the charity sector every year and are critical for small charities. For many small charities paying the cost of business rates could mean the difference between continuing and closing a service.

As a consequence, we have responded robustly to the government’s latest consultation on business rates. CFG have asked for guidance around the provision of rates to be improved and for mandatory rate relief to be extended to 100% to make it simpler and fairer for all charities, but particularly small ones. You can read CFG’s response here.

Many small charities are trapped in unsustainable pension schemes which they can’t exit without fear of triggering so called Section 75 debt. CFG have been engaged on this issue for many years, and welcomed the Department for Work and Pension’s decision to call for evidence on reform. We have responded to this consultation outlining how the rules can be improved, which you can read here.

The government is due to hold a review of the underperforming Gift Aid Small Donations Scheme in 2016, but we want them to hold it sooner. If you have experiences of how this scheme has failed to work for you, please email policy@cfg.org.uk – we always want to hear from small charities.

The Office for Civil Society has launched the £20million ‘local sustainability fund’. It will give grants of between £20,000 and £100,000 to around 250 small and medium sized organisations.

Charities interested in applying must do so via an online diagnostic tool. The window for applications is however very short – charities must apply before the 26 July.

The diagnostic tool can be accessed at http://vcsediagnostic.org.uk - and this article in Civil Society news provides some useful background info.

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Events and training from CFG

CFG regularly run training courses, seminars and conferences to develop the skills and financial leadership of small charities.

Our events bring together excellent speakers from the corporate and voluntary sectors, and are open to all - you do not have to be a member to attend, but CFG members do benefit from reduced delegate fees.

Snapshot of events for small charities coming up is below, and you can see our full events list at www.cfg.org.uk/events.

  • Practical Implementation of the SORP
    Various locations, dates throughout late 2015
    CFG are running a series of courses on the Statement of Recommended Practice (SORP), visit www.cfg.org.uk/SORP for details.
  • Foundation Charity Finance
    Birmingham, London, Bristol or Manchester, dates throughout mid 2015
    This course is designed to provide finance professionals with a sound basic knowledge of the key aspects of charity accounting and reporting, and the particular challenges that finance professionals face when working in the sector.
  • Good Controls and Preventing Fraud
    8 September 2015, London
    This practical course will give you management tools to develop the way you manage risks through good internal controls.
  • Cyber Security Conference
    18 September 2015, London
    The majority of cyber security breaches are not down to poor firewall systems or lax security systems but are as a result of human error within organisations. This conference will teach you how to manage data, prevent cyber fraud, raise awareness of risks internally - and much more. Hosted by Crowe Clark Whitehill.
  • Managing Employment Contract Changes and Exits: Legal and practical training for charities
    21 October 2015, London
    For anyone working in a charity with responsibility for HR. The training will address the process to follow to minimise risk when terminating or changing employment terms. Delivered in association with Russell-Cooke LLP.

What can small charities learn from recent data on charity finance?

Anjelica

What can charities learn from recent data on charity finance? CFG's Senior Policy Officer Anjelica Finnegan explains.

NCVO has recently published the latest edition of the Civil Society Almanac.

It presents a comprehensive picture of the state of the voluntary sector by bringing together data from charities’ accounts, administrative data and surveys.

The overall picture is that the sector’s income (£40 billion) and spending has stagnated but, as ever, the detail is more nuanced than that.

Now more than ever, funders and donors want charities to demonstrate their value, and the information found in the Almanac provides a useful way of highlighting the contribution of charities to the economy. Helpfully, it breaks a lot of the information down by organisation size. Below are some of the key findings from the Almanac that focus on charity finances and on smaller charities.

Income from government continues to fall
Government funding is the biggest single contributor to charities’ income, alongside income from individuals. In real terms, income from government has fallen by £1.9bn since it was at its peak in 2009/10. Preliminary estimates for 2013/14 suggest that this trend has continued.

Small and micro organisations (those with an income below £100,000) are much less likely to receive funding from government than larger charities. Only 16% of their income comes from government sources, the majority of which is from local government.

It is not clear from the data whether smaller charities have been relatively buffered from these cuts, but we do know that there has been a shift away from grant funding to contracts: grants now only account for 17% of government funding to the sector as a whole.

We also know that smaller charities are often less equipped to take on government contracts, especially with the rise of Payment by Results (PbR) contracts.

More money comes from Individuals
Small organisations have the largest share of income from individuals (56%) which includes voluntary income (including donations and legacies) and earned income (including sales of merchandise and fees for events or services).

The Almanac includes a lot of data around who gives and to which charities – for example, they find that young people (16-24) are less likely to give than people in their late forties and older. Understanding donor characteristics and behaviour can be useful in helping to plan fundraising activities.

The majority of charities do not claim gift aid
Gift Aid continues to be under-claimed by the voluntary sector. The Almanac found that there are 160,045 charities. According to HMRC, only 65,000 of these are claiming Gift Aid.

The HMRC’s definition of charities goes beyond the registered charities in England and Wales definition that NCVO uses, so it is possible that even fewer than 41% of charities are claiming Gift Aid.

Given the challenging funding environment for the sector as a whole, it is vital that charities maximise individual donations.

The Almanac also reports that smaller charities spend only 4% of their income on fundraising activities.

The Gift Aid Small Donations Scheme (GASDS) has the potential to help charities capitalise on cash donations, the primary form of giving for the public. However, for small charities, the scheme is too complicated. Read more about how CFG are calling for reforms in this area in the policy update below.

Small charities are a big employer
The voluntary sector employs 821,000 people. Around half of these employees work at small organisations with fewer than 25 employees. By contrast, only 5% work for large organisations (at least 500 employees).

Charities also catalyse the wider contribution of 13.6 million volunteers through social action, worth £23.9 billion per year to the economy.

Loans and Liabilities
Loans make up just 7% of the liabilities of small and micro organisations, compared to around 41% of the liabilities of medium and large organisations.

Many of the sector’s liabilities are related to multi-employer defined benefit pension schemes. The pension deficit has not recovered to pre-financial crisis levels – when the value of many pension scheme assets was wiped out – and has increased from £1.6 billion to £1.7 billion.

CFG are campaigning for changes to pension debt rules – this is outlined above in the policy update.

There is a vast amount of data in the Almanac - you can view this data for yourself, and much more, at http://data.ncvo.org.uk/.

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Latest from the charity commission

Paula Sussex, CEO of the Charity Commission, shares how they are working to increase public trust and confidence in charities.

Charity finance professionals play an essential role in increasing public trust and confidence in charities. This may not necessarily be how you think about your day to day work, but this is exactly what you are helping to do by ensuring your charity is accountable to the public.

Increasing public trust and confidence in charities is one of the Charity Commission’s statutory objectives under the Charities Act, and what we aim to achieve through all our regulatory work.

The good news is that public trust remains high, which I’m sure is due in part to the hard work you put in to making sure your annual report and accounts arrive with us on time and can go on the public Register of Charities. Transparency in charities is also vital, particularly as the public overwhelmingly tells us that it is important to them that charities provide them with information about how they spend their money.

But as we have all seen, it takes little for an institution or sector to lose that hard-earned trust. So what are we doing as the regulator to help keep those trust levels high?

It’s nearly a year since I arrived at the Commission at what was a difficult point - there had been criticism from the Public Accounts Select Committee and an unflattering National Audit Office report, which set out the scale of the challenge on our hands. But a much improved follow-up NAO report published in January confirmed that we are on the right track. An injection of £8 million from the Treasury has also been a vote of confidence in our approach.

But the question that you will be asking is how, as charity finance professionals, will you benefit from the changes that we make?

Part of the answer to this lies in an ambitious three-year change programme that we have begun. We are using our Treasury ‘invest to save’ funding to increase our capacity to deliver a more proactive approach to regulation. This means looking at the fundamentals of where we focus our resource, and we are doing this by establishing systems for identifying and acting on strategic risk, as well as ensuring we have proactive monitoring in areas that present concerns. This, I hope, means that where there has been abuse of charity we are able to deal with it more efficiently and quickly, or where we are forewarned even prevent it from happening. This is good news for you and your charity – dealing with the few bad apples helps to protect the good reputation of the vast majority of charities.

You’ll also see new developments in how we deal with you and your charity colleagues. We will soon be consulting on the introduction of new software that will make life easier for you if you are a charitable company. Watch out for our consultation on introducing an option for charities to submit accounts in iXBRL format where you may already be preparing them, for example if you are filing to Companies House. The iXBRL software promises much more than being just another filing method, it will enable accounting data to be displayed sooner and more accurately; it will open up your accounts information to your donors and others interested in your charity’s work, who will be able to run electronic queries rather than wade through PDF documents.

We want to look at how we interact with charities, whether trustees, charity professionals or Directors. I know that with limited resource we haven’t been as available as people would like, but we hope that by developing new tools, dealing with us will be more straightforward, such as simplifying requests to change your charity name or make a change to your charity’s governing document. We want trustees and their advisers to be able to process routine transactions on-line and with the minimum of delay, fuss and process.

But change is also wider than just technology. It is also about culture, and how we engage with charities. Whilst it would never be right for any regulator to be close to the sector it regulates, we will want to hear your views on many of the changes that we will be introducing. We recently consulted on our new essential trustee guidance, and the response was really encouraging. Most trustees who responded told us that they liked the new format and found the guidance helpful.

Consulting on guidance is just one of many ways we want to work with you and your charity, whether it’s giving feedback on our services, or receiving our regular newsletter CC News which provides updates - such as the recent changes to accounting thresholds, or coming to one of our public meetings held around the country. I hope over the coming months you are able to take up some of these opportunities.

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Choosing an insurance provider

Choosing the right provider for your charity is critical. Martyn Turner, Underwriting Director at Ecclesiastical Insurance Group provides some tips.

Choosing an insurance policy that offers best value and is the most suitable for your charity can appear bewildering at times. The good news, however, is that there is a series of key points which, if given proper consideration, should lead to a sound decision that will serve your charity well for years to come.

Broker versus direct
Most charities will either buy direct from an insurance company or will use the services of an insurance broker.

Buying direct may appear to lead to a more competitive price, but the onus is firmly on the charity to ensure it is purchasing cover suitable for its needs. This means having a clear understanding of the risks to which your charity is exposed and the level of cover required. Some covers, such as employers’ liability, are relatively straightforward and have industry-standard limits. The level of business interruption cover, by contrast, is based on an individual charity’s revenue streams and can be prone to miscalculation. It is imperative, therefore, that you ensure you are comparing like for like.

This is where the skills of an experienced specialist broker can be useful. They use their knowledge and expertise to assess the charity’s risk profile and then search the market for the insurance product which offers the best fit. In this case, the broker acts as the charity’s agent in the insurance transaction, thus reducing the degree of insurance knowledge required by the charity.

Cost versus cover
No two insurance policies are identical, and in what is a highly competitive market place, prices vary. While it is clearly desirable to get the best possible price, an analysis of the variations in cover is an essential step in the buying process.

Again, a broker’s advice can be valuable here. For example, some charity policies provide a measure of trustee indemnity cover as standard. Others do not, in which case it would need to be purchased at additional cost.

The insurance promise
Fundamental to any insurance product is the insurer’s promise upon which it is founded: to indemnify the policyholder in the event of a claim. In essence, this means that if something happens, the insurer is committed to put your charity back into the position it held prior to the event’s occurrence.

The real worth of insurance, does not become manifest until your charity makes a claim, and not all insurers necessarily have the same claims philosophy. The process by which claims are assessed, validated and paid will vary, as will the speed at which that process progresses.

Understanding your potential insurer’s claims management track record is vital. This is a key factor a broker will take into consideration when selecting an insurer, but if buying direct, you should seek out any customer feedback the insurer has chosen to make public. A useful measure published by some insurers is the percentage of customers satisfied with their claims service.

Due diligence
In terms of standard hygiene factors, the most basic considerations are the insurer’s country of domicile and its regulator. Beyond that, there is its financial security rating, which indicates its financial strength and, as a consequence, its claims-paying ability.

A further consideration is the corporate social responsibility programme of the insurer. Many charities will want to satisfy themselves that its governance and ethos fit comfortably with their own position in this area.

Ultimately, the most fundamental question is: how much does my insurer understand about my charity and the charity sector as a whole? Some insurers underwrite many different classes of business of which charity is just one; others are much more specialised and have developed services and products with the charity sector at the forefront of their thinking. This kind of insight may lead to more informed underwriting decisions and pricing that more accurately reflects the degree of risk to which your charity is exposed.

Taking this all into account will allow you to differentiate between products and providers, and develop a meaningful partnership with an insurer.

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A deficit of trust

Peter Askins, Director of Independent Trustee Services Limited, summarises the options for charities with legacy defined benefit pension schemes.

For those CFG members with legacy defined-benefit (DB) pension schemes, the increase in scheme funding deficits is a growing cause for concern, not just for the sponsoring charity but increasingly for donors. As we have seen in one or two extreme cases, the deficit can threaten the continuing viability of the charity. Several have been brought low in these very circumstances.

The similarities between the problems faced by small and medium-sized charities with legacy schemes and small and medium-sized employers in the private sector is marked. Both wanted to do the right thing by their employees but now find themselves burdened with regulatory and funding requirements that were unimaginable when they set up their schemes.

Determining the strength of the sponsoring employer’s covenant presents difficulties for trustees and sponsors in both sectors, but is particularly noticeable in the third sector. The same applies to minimising the impact of the scheme deficit on delivering the aims and objectives of the sponsoring organisation.

Increasingly in the private sector, sponsors are looking to develop strategies designed to lead to the eventual wind up of the schemes. Generally, this means looking at ways to reduce scheme liabilities and alternative funding arrangements; there is a general acceptance that you cannot “invest your way out of a deficit”. These are legitimate aims but present issues for pension fund trustees in ensuring that beneficiaries’ interests are protected.

The recent Budget changes relating to trivial commutation and small pots are welcome as they help to reduce the administrative burden on schemes, and provide beneficiaries with meaningful amounts of capital when they might otherwise receive very small pension amounts. By definition, the effect on scheme funding is not great but in liability reduction terms can be seen as a step in the right direction.

Enhanced transfer values
Enhanced transfer values (ETVs) have been the subject of criticism in the past and have attracted an element of reputational risk. However, standards have improved following the introduction of an industry code of practice, which covers the process and provision of advice and which was approved by both the Pensions Regulator and the Department for Work and Pensions.

When taken in the context of the Budget 2014 changes to defined contribution schemes, which allow access to pension savings, it is incumbent on DB pension scheme trustees to make their members aware of these changes, as taken together, they may be in the beneficiaries’ interest.

The requirement from April 2015 that trustees of DB schemes satisfy themselves that any member requesting a cash equivalent transfer has taken appropriate financial advice chimes with the practice in the ETV code of practice.

The recent announcement that regulators are to review their guidance to trustees and financial advisers in the light of the Budget changes also provides further confidence that where properly implemented, ETV exercises can benefit both the sponsor and the individual beneficiary. Issues such as these and the inherent conflicts of interest for charity trustees who also sit as pension scheme trustees, make up-to-date knowledge and experience of an evolving regulatory and governance landscape on the pensions side an imperative.

The respective liabilities and fiduciary duties of charity trustees and pension scheme trustees are very different. For instance, whilst a charity trustee may invest charitable funds without taking professional advice, if a pension fund trustee did so they commit a criminal offence punishable by two years in prison and an unlimited fine. Although that is an extreme example, there are many more nuanced differences between the two types of trustee.

Increasingly, our experience is that trustees fulfilling both roles are recognising the need to remove conflict and professionalise the pension trustee element. Our two most recent appointments to charity DB schemes have been on a sole corporate trustee basis, having the effect of removing the risks associated with conflict of interest from the trustees and leaving them free to concentrate on the objects of the charity, and where appropriate, their obligations as an employer.

There is a growing awareness in both the private and the third sectors that extending repayment periods in the hope that deficit contributions and investment returns will match valuation assumptions and eliminate technical provision deficits is to a degree wishful thinking. Even if successful, that is the very lowest hurdle that has to be cleared. Sponsors still have the liability to fund ongoing pension commitments in an uncertain financial and regulatory climate.

Without a forward-looking strategy and actions to manage the position proactively, there is an increasing danger that putting off decisions today will lead to catastrophic outcomes in the future.

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