FINDINGS FROM THE ICAEW AND CHARITY COMMISSION PILOT PROJECT OFFERING FREE REVIEWS OF FINANCIAL CONTROLS AND RISK AWARENESS TO CHARITIES

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1 FINDINGS FROM THE ICAEW AND CHARITY COMMISSION PILOT PROJECT OFFERING FREE REVIEWS OF FINANCIAL CONTROLS AND RISK AWARENESS TO CHARITIES SETTING THE SCENE In September 2011, the Institute of Chartered Accountants for England and Wales ( ICAEW ) and the Charity Commission launched a joint pilot project offering 25 charities with income less than 5 million the opportunity to participate in a free review of financial controls and risk awareness by ICAEW members with experience in the sector. These reviews provided an opportunity to charities to receive a free consultation by experienced practitioners on the charity s policies, procedures and practices relating to internal controls and risk. The reviews covered general awareness and governance topics on strategy and planning, overview of risk awareness and management, internal financial controls, fraud and financial abuse management and information and communication (focusing on management accounts and financial performance rather than statutory accounts). The reviewers and charities discussed and agreed the reports. ICAEW has collated the reports and the collective outcome of the reviews has been summarised anonymously in this report, which includes key themes, trends and feedback from the reviewers and charities participating in the project. Timetable for the pilot project After the September 2011 launch of the review at the ICAEW s Annual Charity Conference, charities and reviewers were asked to volunteer to participate in this pilot project. Approximately 75 charities and 75 reviewers volunteered to take part. The pilot was limited to 25 charities with income under 5m. Further information on the size and constitutional status of charities participating in the pilot project can be seen in figure 1 and figure 2 in the appendix. Volunteer ICAEW members with experience in the sector and the charities were matched by location, ensuring there was no conflict of interest. The framework and supporting documentation used in the review project were designed in collaboration with the Charity Commission and were publicly available on the ICAEW s website (icaew.com/reviewproject). The reviews were conducted mainly in the Q The reports prepared by the reviewers were discussed and agreed with the charities. In order to prepare the initial draft summary of the anonymised report containing key themes and findings, completed reviews were reviewed by myself and Anne Davis, Head of Charity and Voluntary sector at ICAEW. 1

2 This draft report was discussed with reviewers at the Reviewers Panel meeting in April. Representatives from the Charity Commission joined the meeting after detailed discussions on the reviews and the anonymised report, to hear comments from the reviewers on the pilot project. In addition, reviewers and charities were able to make comments about the process via an anonymous on-line questionnaire. The final summary report was discussed with the Charity Commission and will be available on ICAEW and the Commission s website on the same day as the Commission s public meeting on 24 May on financial controls in Birmingham. Content of the review As outlined in the charity review report available at icaew.com/reviewproject, the review included a general discussion with the charity on key challenges and opportunities the Charity Commission s financial guidance and examples of innovative and good practice. In terms of detail, reviewers discussed the following governance topics with the charities: Strategy and planning Overview of risk awareness and management Internal financial controls Fraud and financial abuse management Information and communication (focusing on management accounts, financial performance rather than statutory accounts) The reviewer rated the charity s performance on the above five topic areas. This is summarised in figure 3 in the appendix. KEY FINDINGS General awareness and discussion As referred to above, the reviews conducted as part of this pilot project a general discussion on key priorities and challenges faced by charities, the Charity Commission s financial guidance and examples of innovation and best practice by charities. These are summarised below. Key challenges and opportunities Funding Most of the charities reviewed indicated concern over the fall in their income, or in the case of NHS-related charities, the effect the restructuring of the NHS was likely to have on their income Many charities were looking for a diversification of funding sources There was also the question of a lack of independence where there was a single donor of income or a predominant donor Those with shops indicated that donation of goods was reducing and there was more competition from other charity shops in the high street 2

3 Trustees and volunteers Charities were looking to replace paid staff with more volunteers to cut costs Charities were finding it difficult to attract volunteers and new trustees Many of the smaller charities used their trustees to substitute for paid employees, particularly in the financial arena A number of the reviews mentioned that trustees needed more training on financial management Charity Commission Financial guidance Both CC3 The Essential Trustee: what you need to know and CC 8: Internal Financial Controls for Charities were generally liked and thought to be good documents by trustees Many of the charities referred to and liked CC26: Risk Management and Charities Examples of good practice The reports indicated a number of areas of good practice relating to trustees and sharing of best practice via networking but no real innovations were being operated: Trustee induction pack produced in a disk format Agendas for next trustee meeting set at the end of the last meeting Non-trustee members on sub-committees Colour-coding trustee meetings documentation packs for signature, approval, information, etc. Peer grouping of charities of a similar nature to discuss issues GOVERNANCE TOPICS In addition to identifying key trends and themes, the reviewer rated the charity s performance on the five governance topics. In general, 42% of charities were strong in the governance topics reviewed, 46% had some gaps and 12% had some significant gaps. Strategy and planning 56% of charities had strong controls, 36% had some gaps and only 8% had significant gaps in strategy and planning. So, in general, this is very positive. However, there are some areas for further consideration referred to below. There needs to be a strengthening of the financial acumen of non-accountant board members 3

4 Some charities did not conduct skills audits nor did they have succession plans in place for their staff and volunteers Some charities had obviously spent considerable time and effort on their strategies; others either had little or no strategies or were out of date Some charities had not updated their strategies or forward plans due to the changing and uncertain funding environment Risk awareness and management 32% of charities had strong controls, 56% had some gaps and 12% had significant gaps in risk awareness and management. Generally the findings on risk awareness and management were mixed. Some charities had quite sophisticated systems; whereas others, particularly the smaller charities, were still embarking on the concept and many did not have any risk process Some smaller charities without a risk process did discuss risk at their meetings and had risk management policies. However, those discussions were not always documented in the minutes of the Trustees meetings Some of the larger charities had processes to determine risk but there wasn t a formal process of reviewing and updating the risk register, including assigning responsibilities for mitigating risk. In addition, few charities discussed risk appetite Internal financial controls Generally the findings were good in this area. 40% of charities had strong controls, 48% had some gaps and 12% had significant gaps in their internal financial controls. There were a few general findings that the reports highlighted. There was a concern about the lack of segregation of duties in the smaller charities. In order to overcome this, some suggestions from reviewers were: - Trustees should do more spot checks on financial controls - Strengthening financial controls in smaller charities by appointing a treasurer - Ensuring that the controls over internet banking are as effective as cheque payments - Adopting dual authorisation procedures for internet banking was important - Annual review of financial controls by the Board of Trustees, including identification of gaps and actions to be taken There were concerns over the oversight and control of cash flows relating to donations, fund raising events, collections etc., especially if these activities were based in different locations Some of the smaller charities had no documentation of control processes or policies, including conflict of interest procedures and policies 4

5 The smaller charities were less likely to have a fixed asset register which is useful for control and insurance claims purposes There was some concern over the lack of documentation supporting grants made overseas Fraud and financial abuse management 28% of charities had strong controls, 56% had some gaps and 16% had significant gaps in fraud and financial abuse management. As outlined below, most of the gaps related to lack of or out-of-date policies and procedures. The findings from this section were as follows:- A large majority of the charities had no or very limited anti-money laundering policies Few had Bribery Act policies Few had policies around fraud and the reporting of fraud Information and communications Generally, the message is positive here. 52% of charities had strong controls, 36% had some gaps and 12% had significant gaps in information and communication. The findings from this section were as follows. Mixed scope and frequency of reviewing financial information. Most charities did have information on budgets and actual results both monthly and cumulative Management accounts for smaller charities often only consisted of an income and expenditure account but with no balance sheet or cash flow forecasts Lack of comments on the trustees report regarding risk, especially in relation to significant activities and events of the charity e.g. fund raising campaigns, loss of grant income, use of designated funds There was sometimes no information regarding the reserves policy Sub-committees often did not have any terms of reference or delegation of authority documents THEMES From the report findings and the comments from the Reviewers Panel meeting, there appears to be a number of recurring themes. Funding There is a real concern over funding in all income bands taking part in the review. There was very little comment from the charities on merger, collaborations or shared services; although the reviewers felt that this should be the way forward for many charities with funding issues. 5

6 Governance There was a general theme around the difficulties of charities attracting new trustees and specifically attracting trustees with the relevant skill base. Another general theme was that many trustees do not understand the financial reports that they receive and the reviewers thought that there needed to be a greater ownership of the report and accounts by the board of the trustees as a whole. On a number of occasions there were comments about the lack or poor communication between the trustees and the senior management team and the reviewers generally believed that there was a tendency for charities to underfund the finance function of their charities both in terms of resources and people both at the board and the senior management level Fraud Prevention Policies Charities were, generally, weak in this area, in spite of readily available guidance by the Commission and sector bodies. Advice and Guidance Generally the reviewers felt that their charities had an awareness of the advice and guidance offered by the Commission. However there was criticism by the charities and indeed the reviewers as to the accessibility of the website to its users. Many commented on the need for proportionality of guidance in relation to the size of charity. The volume of information available is large and the smaller charities wanted to focus on key areas relative to their size as opposed to the complete panoply of requirements. The reviewers suggested that some type of modular guidance based on the size of the charity would seem appropriate. Other reviewers thought that specific guidance for specific sectors would be helpful and that umbrella organisations could help in providing that guidance. More case studies on the website would also be useful. CONCLUSION The main themes occurring from this pilot review are perhaps not that surprising. However, it does show that there is still substantial concern over the financial health of many charities in this current economic climate and the need to encourage a culture of mergers, collaborations and shared services. In terms of governance there are concerns about attracting new trustees and the financial awareness of those existing trustees. In regard to advice and guidance from the Commission, the restructuring of the Commission s website and a more streamlined approach to guidance to cater for different types and sizes of charities is a key message from the sector. Nick Brooks Chair of Review Panel Chair of the ICAEW Charity and Voluntary Sector Group and Head of not for profit at Kingston Smith, Chartered Accountants 6

7 Details of the charities participating in the pilot Charity Commission / ICAEW review project Reports received: 25 Figure 1: Charity's income band Income band Total % 0-250k 5 20% Over 250k - 500k 4 16% Over 500k - 1m 5 20% Over 1m - 5m 11 44% Total % Figure 2: Charity's constitutional status 40 60% 40% 20% 0% Charity's Income band 0-250k Over 250k - 500k Over Over 500k - 1m - 5m 1m Charity's performance in the governance topics Constitutional status Total % Unincorporated 4 16% Incorporated 21 84% Total % (significant gaps) 2 (some gaps) 1 (generally strong) Figure 3: Overall rating of charity's performance in the governance topics Overall rating Topics Strategy and Planning Risk awareness and management Internal financial controls Fraud and financial abuse management Information and communication Total % 1 (generally strong) % 2 (some gaps) % 3 (significant gaps) % Total % Appendix