A report published today by the Charity Commission suggests that many larger charities are understating their charitable expenditure in their public annual returns or their accounts.
The regulator scrutinised the trustees’ annual reports and accounts of over 180 charities whose annual returns suggested they had spent less than 10% of their income for the year in question on charitable activities (see Notes to editors).
The results suggest that the majority of these charities (57%) were able to provide reasonable explanations for the low expenditure against income for the year in question - such as the receipt of large ‘one-off’ donations or the accumulation of reserves for specific projects.
However, it found that the remaining 43% had made errors either in their annual returns or their trustees’ annual reports and accounts, with the effect of significantly underreporting the level of their charitable expenditure
The commission points to research showing that ‘ensuring a reasonable proportion of donations get to the end cause’ is among the most important factors driving public trust and confidence in charities and points out that such errors risk alienating supporters or potential supporters.
Michelle Russell, Director of Investigations, Monitoring and Enforcement at the Charity Commission, said:
It is heartening to see that the majority of charities we looked at as part of this review were able to provide reasonable and legitimate explanations as to why their charitable expenditure was so low for the year in question.
But we are concerned that so many charities are making basic errors in their annual reporting. Aside from being a regulatory concern and undermining public trust in charities and the information they provide about their work and finances, it is likely to impact on how they are perceived by donors and potential supporters.
Accountability is a fundamental principle of charity and trustees must ensure their charities report on their finances and activities accurately and in a timely manner.
Three charities’ accounts reflected more serious non-compliance issues. Their accounts had not been audited, as required for charities with incomes of over £500,000, in either the year that the commission reviewed for the study or their most recent submissions. Two of the charities had also not recorded any value for charitable expenditure in their accounts. The commission refused to accept these returns and has insisted these charities resubmit compliant accounts for the years in question.
The commission says it will increase its work to promote its guidance to help improve awareness and compliance.
Today’s report forms part of a wider programme of pro-active accounts monitoring reviews by the commission. Previous areas of focus have included the overall quality of charity accounts, charities’ compliance with public benefit reporting requirements and charities with pension deficits.
Notes to editors
The Charity Commission is the independent registrar and regulator of charities in England and Wales. We act 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 with annual incomes of over £500,000, which are required to provide a summary of their annual accounts in Part B of the annual return, and to submit fully audited accounts to us. We identified over 440 charities in this category, of which we scrutinised 188.
- We used 10% as the criterion because it would produce a manageable sample size. This is not intended to suggest that this is a benchmark for minimal charitable expenditure.