Decision

Charity Inquiry: One Community Organisation

Published 12 July 2022

Applies to England and Wales

The charity

One Community Organisation (‘the charity’) was registered on 17 June 2009. It is governed by a Constitution dated 15 May 2009.

The charity’s objects are:

• to advance education in basic literacy, English language and other personal skills for the public benefit in the Lozells, Newtown and Aston areas of Birmingham and the surrounding area
• to promote for the benefit of the inhabitants of Lozells, Newtown and Aston areas of Birmingham and the surrounding area the provision of facilities for recreation or other leisure time occupation of individuals who have need of such facilities by reason of their youth, age, infirmity or disablement, financial hardship or social and economic circumstances or for the public at large in the interests of social welfare and with the object of improving the condition of life bf the said inhabitants

The charity’s entry can be found on the register of charities.

Background

In September 2019, the charity reported a serious incident concerning burglaries at the charity’s office and a trustee’s home. The Commission contacted the charity to gather more information in relation to this, however the details provided by the trustees were not consistent with the Commission’s records. For example, the report mentioned an employee, however the charity’s reported income and expenditure did not suggest that there were enough funds to pay a salary.

In April 2020, the Commission sought to clarify the discrepancies with the trustees. However, the trustees’ responses continued to contradict the information previously provided.

A review of the charity’s bank statements, showed that the trustees had understated the charity’s income and expenditure for the financial years ending (‘FYE’) 31 December 2017 and 2018 by between £70,000 and £80,000 in each year.

This review also identified that between January 2017 and August 2020, over £200,000 had been transferred from the charity’s bank account to a trustee’s private bank account. The purpose of these payments was not clear, and the trustees were not able to satisfy the Commission that the charity had adequate financial controls.

Issues under Investigation

On 01 December 2020 the Commission opened a statutory inquiry (‘the inquiry’) into the charity under section 46 of the Charities Act 2011 (‘the Act’) to examine the following:

• the extent to which the trustees are complying with their legal duties in respect of their administration, governance and management of the charity, with particular regard to their accounting responsibilities
• the extent to which the trustees responsibly manage the charity’s resources and financial affairs, with particular regard to financial controls and related party transactions
• the extent to which any failing or weaknesses identified in the administration of the charity during the inquiry were the result of misconduct and/or mismanagement by the trustees

The inquiry closed with the publication of this report.

Findings

Compliance with legal duties in respect of the administration, governance and management of the charity

The inquiry’s review of the charity’s accounts, annual returns and receipts found that it was operating outside of the area of benefit as stated in the governing document. For example, it was found that the charity had been operating/supporting events in London.

When trustees want to make changes to the charity’s purpose, which includes the area of benefit, they must follow the procedures specified in their governing document and provide any amendments to the Commission within the specified time period in order for them to be valid. The trustees told the inquiry that they were not aware of this requirement.

Trustees are collectively responsible for a charity’s management, and they should act together, in accordance with the requirements of their governing document and the general law. However, the trustees told the inquiry that rather than making decisions relating to the charity together at minuted meetings, the vast majority of decisions were made by the chair and then relayed to the other trustees individually, often over the phone. This was a breach of clause 11.2 of the charity’s governing document, which requires a decision-making quorum of two trustees and clause 23 which requires minutes to be kept of the proceedings and decisions at meetings. Any decision made without a quorum is invalid.

The inquiry also found that the trustees did not have a basic understanding of their responsibilities and were unfamiliar with the charity’s governing document and some of the charity’s internal policies, despite several of these having been recently revised and all the trustees signing the revised versions.

The inquiry found that there was misconduct and/or mismanagement in the administration of the charity by the trustees. The trustees operated the charity outside the areas specified in the governing document and decisions were made without the required quorum of two trustees, making these decisions invalid.

On 27 October 2021, the inquiry issued the trustees with a comprehensive Action Plan under section 84 of the Act (‘the Action Plan’). The Action Plan required the trustees to improve the charity’s overall governance and decision-making procedures. It also required the trustees to consider properly amending the charity’s governing document to ensure the charity’s objects were fit for purpose. The trustees have complied with and implemented the Action Plan.

Compliance with accounting responsibilities

The inquiry found that the trustees had not provided accurate accounting information for the FYE 31 December 2017 and 2018, to the Commission as they were unaware of the correct accounting requirements. A review of the charity’s bank statements found that the income and expenditure that the trustees reported to the Commission for both years had been understated by between £70,000 and £80,000.

The trustees informed the Commission that the Chair used their own bank account to make purchases for the Charity and he was then reimbursed for this expenditure from the charity’s bank account. These transactions were not included in the charity’s accounts. The trustees told the inquiry that they had incorrectly understood that the accounts should not include the transactions that had gone through the chair’s bank account. However, this was charity expenditure financed from charity income and should have been included in the charity’s accounts.

Trustees have legal responsibilities to ensure proper accounts are prepared. The inquiry found that the charity’s trustees were unclear about how to correctly account for their charity’s finances which ultimately resulted in incorrect information being supplied to the Commission.

As required by the Action Plan, the trustees have since appointed a professional accountant to assist them in preparing future accounts.

Compliance with the Commission’s orders and directions

On 16 December 2020, the inquiry used its information gathering powers under section 47 of the Act to gain further information from the trustees. This included requesting receipts for payments made to the chair and why these payments were in the best interests of the charity.

The trustees failed to provide all the supporting documentation for the payments and explanations for why these payments were in the best interests of the charity, as requested, which demonstrated only partial compliance with the direction.

Also on 16 December 2020, the inquiry sent the trustees an order under section 76(3)(f) of the Act to restrict payments from the charity’s bank account. This order meant that the Commission’s permission was required before any payments were made from the charity’s bank account to a trustee’s – or a connected person’s – bank account.

However, the inquiry found that between December 2020 and January 2021, six payments totalling £1100 were made to the chair from the charity’s bank account. Permission was not sought before these payments were made. The chair told the inquiry that these payments were made during the period of overlap between the old account closing and the new account opening and could not be cancelled. However, despite being aware that the inquiry was open and confirming that they understood the terms of the order, they did not seek to notify or obtain permission from the inquiry.

Charity trustees must comply with Orders and Direction of the Commission. Failure to do so can be a criminal offence and in this case was misconduct and/or mismanagement in the administration of the charity.

Responsible management of the charity’s resources and financial affairs, with particular regard to financial controls and related party transactions

The inquiry found that between January 2017 and January 2021, over £280,000 of the charity’s funds was transferred to the chair’s personal bank account.

The trustees told the inquiry that these funds had been transferred because the charity’s bank account at the time, did not come with a bank card. As mentioned above, the chair would therefore use their own account to make purchases on behalf of the charity and would be reimbursed by the charity. The inquiry found that the other trustees were aware of this arrangement.

The inquiry directed the trustees to provide receipts for all the payments that had been made by the chair on behalf of the charity and subsequently reimbursed. The trustees were not able to provide supporting documentation for around £100,000 (between January 2017 and January 2021). When asked about the discrepancy, the trustees explained that this would have been expenditure for sundry expenses, for which receipts could not be found or were not kept. However, in the absence of any supporting documentation, the inquiry cannot conclude whether the £100,000 was spent solely in furtherance of the charity’s objects.

The inquiry found that the trustees could not fully account for all the charity’s expenditure due to a lack of proper record keeping and robust internal financial controls. As a result of this, the trustees failed to demonstrate that over £100,000 of the charity’s funds were used for exclusively charitable purposes. This was misconduct and/or mismanagement in the administration of the charity and a breach of trustee duties.

As part of the Action Plan, the trustees were required to update the charity’s financial controls policy and consider appointing an accountant to assist them with record keeping and accounts preparation. The trustees have opened a new bank account which came with bank cards and provided assurances to the inquiry that the chair’s bank account would no longer be used to conduct transactions on behalf of the charity. As previously mentioned, the trustees have also appointed an accountant. The section 76(3)(f) order was discharged in November 2021.

Conflicts of interest

The trustees confirmed to the inquiry that the chair transferred funds from the charity’s bank account to their own personal account when reimbursing money spent on behalf of the charity, without the supervision or authorisation of another trustee. This is both a conflict of interest which the trustees failed to recognise and manage, and a breach of the charity’s own financial controls policy.

The charity’s chair is also the sole director of a non-charitable company (‘the company’). On review of the charity’s receipts, the inquiry identified around £3000 worth of purchases for the company paid for by the charity. The trustees told the inquiry that they verbally agreed that the use of the charity’s funds on the company was in the charity’s best interests as there were additional benefits for the charity. For example, the company’s website contained an option to donate to the charity directly and that the company in its activities, which align with the charity’s objects, actively promoted the charity.

The inquiry has seen evidence of donations being received by the charity because of this arrangement. Yet, while it may have been in the charity’s best interest to have a relationship with the company, the trustees should have formalised a written agreement between the charity and the company and ensured that any arrangement did not lead to incidental personal benefit for the chair.

The trustees should have also appropriately managed the conflict of interest this presented for the chair. As the chair is the director of the company, he should have absented himself from any discussion relating to the company, in accordance with clause 4.7 of the charity’s governing document. However, the trustees confirmed that the chair was involved in the decisions about the company as they were not aware that this was a conflict of interest and therefore did not take any steps to appropriately manage it.

The inquiry found that the trustees did not appropriately recognise and manage conflicts of interest, acted in breach of the charity’s policy and governing document and this was misconduct and/or mismanagement in the administration of the charity.

The Action Plan required the trustees to familiarise themselves with the Commission’s guidance on managing conflicts of interests and to formalise the relationship between the charity and the company.

Conclusions

The Commission found that there had been misconduct and/or mismanagement in the administration of the charity and a breach of duty by the trustees. The trustees were not sufficiently aware of the charity’s governing document and internal policies and therefore did not operate the charity in line with them. The trustees also failed to fully comply with the Commission’s orders and directions.

The Commission found that the charity had poor financial controls and record keeping systems which meant the trustees were unable to fully account for all of the charity’s expenditure. The trustees were unaware of their accounting responsibilities and as such, they failed to maintain, prepare and report accurate accounting information, and were not aware of how to appropriately recognise or manage conflicts of interests.

As a result of the inquiry the trustees improved their understanding of trustee duties and are more aware of their responsibilities and the provisions of the charity’s governing document. They have reviewed the Commission’s guidance on financial controls, conflicts of interest, and reporting and accounting. The trustees are currently in the process of making changes to the charity’s Constitution. The charity’s financial controls and conflicts of interest policies have been updated and the trustees have formalised the terms of the relationship between the chair’s company and the charity.

The trustees co-operated with the inquiry and demonstrated a willingness to address the regulatory concerns identified. The Commission is satisfied with the steps the trustees have taken to improve the charity’s governance and move the charity to a more secure footing.

Regulatory Action Taken

Information gathering powers under sections 47 and 52 of the Act were used throughout the inquiry.

On 16 December 2020 the inquiry issued a section 76(3)(f) order to restrict payments made from the charity’s bank account. The order was discharged on 29 November 2021.

On 27 October 2021, the inquiry issued a section 84 action plan to the trustees. The inquiry monitored the trustees progress with this action plan and is satisfied with the trustee’s compliance.

On 30 March 2022, the inquiry issued regulatory advice and guidance under section 15(2) of the Act.

Issues for the wider sector

Every charity needs an effective trustee body which has control over the administration of the charity and acts as a whole, especially because all trustees are equal in responsibility. Trustees must ensure that their charity has adequate financial and administrative controls in place, and that the funds of their charity are applied for the benefit of the public for which it has been set up.

Charities are accountable to their donors, beneficiaries and the public and it is therefore important that the financial activities of charities are properly recorded, and their financial governance is transparent.

Further guidance on financial controls is available on GOV.UK.

Conflicts of interest are more likely when there are only a small number of trustees on the board, when trustees are closely related, or when the charity has dealings with organisations in which the trustees have interests. It is vital that trustees avoid becoming involved in situations in which their personal interests may be seen to conflict with their duties as trustees. The trustees should put in place policies and procedures to identify and manage such conflict.

Further guidance on conflicts of interest can be found on GOV.UK.

Trustees are required to keep accounting records for their charity. Every charity’s accounting records must be sufficient to show and explain its transactions and disclose with reasonable accuracy its financial position. Therefore, in order to show that they are complying with their legal duties, trustees must keep records and an adequate audit trail to show that the charity’s money has been properly spent on furthering the charity’s purposes for the benefit of the public.

Trustees of charities with an income of over £25,000 are under a legal duty as charity trustees to submit annual returns, annual reports and accounting documents to the commission as the regulator of charities. Even if the charity’s annual income is not greater than £25,000 trustees are under a legal duty to prepare annual accounts and reports and should be able to provide these on request. All charities with an income over £10,000 must submit an annual return. Failure to submit accounts and accompanying documents to the commission is a criminal offence. The commission also regards it as mismanagement and misconduct in the administration of the charity.

Further guidance on charity accounting can be found on GOV.UK.