A report published today by the Charity Commission suggests that many charities may be incorrectly overstating their governance costs in their public annual returns or their accounts.
The regulator identified 76 charities with an annual income of over £500,000 that appeared to have high governance costs according to their returns. The regulator defined this for the purpose of the review as reported governance costs of more than 20% of their total expenditure. (See Notes to editors).
The results suggest that only 3 charities (4%) had a reasonable explanation for the figures they reported. The vast majority (87%) had incorrectly allocated costs to governance costs that should have been included in other categories of expenditure, including charitable expenditure. The most common mistake was to equate governance costs with general management and administration costs.
The remaining 9% of charities did not in fact have high governance costs in their accounts and had completed their annual returns incorrectly. A recent commission report found similar errors in completing the annual return in charities which had reported low charitable expenditure.
Many charities in the sample seemed either not to understand the difference between support costs and governance costs or were not fully aware of the Statements of Recommended Practice’s (SORP’s) requirements for reporting their expenditure in the statement of financial activities (SOFA).
Michelle Russell, Director of Investigations, Monitoring and Enforcement at the commission, said:
We continue to be concerned that a large number of charities are not meeting the accounting requirements as set out in the SORP and are making basic errors in their annual reporting. The incorrect reporting of financial information causes confusion, has a real impact on public trust and confidence in charities and it is also likely to impact on how they are perceived by donors and potential supporters.
The commission provides guidance to trustees on accounting and reporting to help trustees and practitioners and we will continue to promote our guidance to improve awareness and promote compliance with the charity SORP.
The commission has said that that the findings from this review emphasise the importance of trustees having a good understanding of their charity’s activities and how these are reported in their annual reports, accounts and annual returns. It is essential for independent examiners and auditors who may prepare the accounts or may audit/examine accounts to check the basis of cost allocation used to guard against the accounts being materially misstated.
The SORPs and guidance to help charities comply with them are available on the SORP microsite.
Notes to editors
The Charity Commission is the independent registrar and regulator of charities in England and Wales, acting in the public’s interest, to ensure that:
* charities know what they have to do
* the public know what charities do
* charities are held to account
- The research was restricted to charities which reported both governance costs of more than 20% of their total expenditure and also reported total expenditure that was more than 80% of their total income.
- We have used the figure of 20% of expenditure because it produced a manageable sample size that is consistent with the purpose of the review. It is not intended to suggest that this is a benchmark for the maximum amount of governance costs that is acceptable.
- We used the total expenditure in excess of 80% of income criteria in order to exclude charities which are more likely to also have low charitable expenditure, which is the subject of a separate review.
- The 2005 SORP defines governance costs as ‘the costs associated with the governance arrangements of the charity which relate to the general running of the charity as opposed to those costs associated with fundraising or charitable activity. The costs will normally include internal and external audit, legal advice for trustees and costs associated with constitutional and statutory requirements eg the cost of trustee meetings and preparing statutory accounts. Included within this category are any costs associated with the strategic as opposed to day to day management of the charity’s activities’.
- Changes to the Charity SORP which apply to reporting periods beginning on or after 1 January 2015 mean that governance costs are no longer shown on the face of the SOFA. Instead they must be separately identified within the required analysis of support costs. Charities must understand their costs and allocate them appropriately between their fundraising and charitable activities.