Whether you are the auditor, the independent examiner or the accountant, you want your charity client accounts to be accurate. Today, the Charity Commission has published a report on 'Low charitable expenditure' suggesting that many larger charities (those with income over £500,000) are understating their charitable expenditure. Now is the time to pick up that calculator and work out your clients percentage of income being spent on charitable expenditure.
You may be wondering why it matters. Because it is a risk area for charities.
This is two fold, the first being that legislation requires charities to spend the income they receive on achieving their charitable purpose within a reasonable period of time. The second is that crucially the public who donate to charities want their donations to count. If the charity does not demonstrate that their income is used for their charitable objectives then they may see a reluctance from donors to give them money.
The public want to see a 'reasonable proportion of donations getting to the end cause'.
How big is the problem?
The report looked at a sample of 188 charities whose annual returns suggested they had spent less than 10% of their income on charitable activities. These charities all had income of over £500,000.
Within this sample it was found that 57% of charities were able to provide reasonable explanations as to why the charitable expenditure was so low. Common explanations being the receipt of large 'one-off' donations, future purchase of assets, the accumulation of reserved for specific projects and the fact that these were consolidated accounts and the subsidiary results were being included in costs of generating funds.
A further 27% of those sampled had incorrectly completed their annual return. Which then left a worrying 16% of the sample where the accounts were just wrong. It should be remembered that potential donors to the charity may use the Charity Commission website to assess the charity's results and as such getting the information wrong on the annual return may affect their reputation just as much as if the accounts were wrong!
What should you do now?
Now is the time to check the accounts. Remember governance costs and costs of generating funds are not included in charitable expenditure. A quick peek at what is being included within these categories may highlight that items are in fact charitable expenditure.
As a reminder governance costs are those associated with providing the governance framework (eg. costs of preparing and having the statutory financial statements audited, costs of trustee meetings such as expenses).
Costs of generating funds will include; costs of generating voluntary income such as start up costs of a new fundraising activity or costs of a fundraising agent if applicable; fundraising trading including those costs of goods sold from fundraising; and investment management costs.
The report also highlighted that 7 of those charities selected had submitted independent examiner reports instead of audit reports. This is worrying in itself so please make sure you understand the audit exemption rules for England and Wales, in particular since they have changed this year- for further information see my blog on 'Government responds to charity audit and independent examination consultation'.
A quick reminder to the person in the charity who deals with the annual return - the information stated should agree to the financial statements!