Charity Commission: 2023 review of statutory inquiries

The Charity Commission was established 150 years ago for ‘securing the due Administration of Charitable Trusts’. While the Commission’s role as regulator and registrar has since been expanded, investigation into concerns with the administration of charities is still central to protecting the public’s interest in the sector. Where the Commission identifies serious abuse or regulatory concerns, it may open a statutory inquiry to identify and examine in greater detail any risks to the charity and its beneficiaries. Opening an Inquiry allows the Commission to use additional information-gathering powers, the findings from which will determine the next steps, ranging this year from recommendations on governance to disqualification of trustees and removal of charities from the register. 

Trustees have ultimate control over, and legal responsibility for their charity’s administration, though an inquiry can also affect employees and advisors. Statutory inquiries, though crucial to thorough regulation of the sector, can be extremely challenging for the individuals involved and have a lasting impact on the charity’s reputation, irrespective of the outcome.

The publication of statutory inquiry results enables trustees to learn from the findings and apply these to the charities they support. So far this year, the Commission have published thirteen reports, which we have surveyed to identify the key themes and highlight the pitfalls that trustees can fall into. 

Financial controls

In investigating this year’s inquiries, the Commission identified in the bulk of the investigated charities inadequate or inappropriate financial controls. This finding amounts to misconduct or mismanagement on the part of trustees and in some cases was severe enough to warrant trustee disqualification. Internal financial controls are essential for the proper safeguarding of charity assets, monitoring and identification of financial risks, and keeping adequate accounting records. 

Issues identified by the Commission this year included:

• Failure to submit full and accurate annual accounts: In one case, a single annual return was filed over 18 years of the charity’s operation. See Charity Inquiry: Birmingham Education Trust.

• Loans and financial agreements without formal documentation: Two investigated charities made or received loans without entering any written agreement or keeping formal records. See Charity Inquiries: Rhema Church London and The Cowesby Trust.

• Payments to trustees: One investigated charity made payments to a trustee and CEO’s personal bank account, while others transferred funds to connected businesses. In some cases, this was suggestive of fraudulent activity and misapplication of funds, however, the investigation into Care4Calais acknowledged that the payments were to the benefit of the charity, saving them exchange fees. This was nonetheless found to be inappropriate. See Charity Inquiries: Care4Calais and The Ashley Foundation.

• Inappropriate or missing financial control procedures: This is a broad area but setting and following adequate procedures with more than one point of authorisation is essential. In one case, the lack of implemented procedures led to the signing and distribution of blank cheques by a charity treasurer. See Charity Inquiry: The Ashley Foundation.

• Entering commercial agreements: These were agreements entered into that were not in the charities’ best interests, representing inadequate planning, scrutiny and monitoring of expenditure by trustees. See Charity Inquiry: Hospice Aid UK.

Six inquiries published this year were opened as a result of charities not filing accounts, or of persistent lateness in doing so, and the Commission also published the results of a class inquiry opened to proactively target ‘double defaulter’ charities who hadn’t filed for two or more years. Some of these investigations led to the rectification of accounting records and improvement of procedures for the charities involved, but others subsequently revealed further areas of mismanagement. Trustees should be conscious of the enhanced scrutiny likely to arise from failing to file accounts within statutory deadlines. 

Trustees should make themselves familiar with the Commission’s guidance, updated earlier this year, so that they are conscious of the regulations and risks and can ensure compliance with regulatory as well as internal policies and procedures. Though trustees may delegate detailed work to members of staff or specific trustees, all trustees are ultimately responsible for their implementation and monitoring. The Commission provides a useful checklist, which can be consulted to ascertain whether your charity has adequate measures in place and improve these if necessary. 

Conflicts of interest

The personal and professional connections of trustees can be beneficial to the organisations they work with but may also give rise to conflicts of interest and loyalty. These are not necessarily a problem but must be identified and addressed to ensure openness and that decisions made are in the best interests of the charity. Failure to do this can invalidate decisions or leave them open to challenge, as well as being potentially harmful to the reputation of the charity and the sector as a whole.  

Issues identified by the Commission this year included:

• Unmanaged conflict with connected organisations: A trustee in one case acted as the director of a football club whose premises were leased by the charity without absenting themselves from relevant discussions and decisions. See Charity Inquiry: Newham Community Leisure Trust.

• Relationships between trustees not identified or managed: The Commission investigated an incident of a complaint against a trustee being investigated by their own family member. In another charity, a married couple were the only trustees and made decisions together. See Charity Inquiries: Care4Calais and Birmingham Education Trust.

• Employment of trustees and payments for services: While this can be acceptable within the statutory criteria, employment in some cases was established without any management of the inherent conflict. Trustees at some charities participated in discussions and authorised their own reimbursement. See Charity Inquiries: Birmingham Education Trust and Rhema Church London. 

It is a legal requirement that trustees identify conflicts of interest and prevent them from affecting decision making. Should a charity not be able to provide sufficient justification for a decision made, they may be vulnerable to challenge by the Commission or an interested party. The Commission sets out the regulations and best practice around conflicts of interest, which trustees should familiarise themselves with. It is advisable for all charities to have a conflict of interest policy and register in place, so that potential issues can be dealt with consistently as they arise. 

Compliance with governing document

As well as complying with regulations set out in law, charities must ensure they are acting in accordance with their governing document. The main duty of trustees is to advance the purposes of the charity, which will be set out in the governing document, as well as the means by which they may achieve them. More commonly, trustees fall foul of administrative provisions in the governing document, such as those pertaining to frequency of meetings, management of finances and appointment of trustees. These may be in excess of the general legal requirements for charities, so it is essential that all trustees familiarise themselves with this document and ensure it is complied with. 

The governing document will have been constructed to support the proper administration of the charity and failure to comply with it can filter down, causing subsequent governance and financial breaches.  

Issues identified by the Commission this year included:

• Salaries paid to connected persons: This must be permitted under the rules contained in the governing document, which was not the case in one Commission report. See Charity Inquiry: Birmingham Education Trust.

• Insufficient trustees: The governing document sets out a minimum number of trustees who may be on the charity’s board, as well as a minimum ‘quorum’ for decisions to be taken. One charity had a single trustee in place in breach of its rules, allowing them to make and authorise payments to their private account at inquorate meetings. See Charity Inquiry: The Cowesby Trust.

• Insufficient meetings: Trustees have a duty to properly manage and monitor the charity’s activities, and failure to hold regular meetings can prevent this. Most governing documents will set a minimum number of meetings per year for trustees and members to attend. In one case, failure to comply with this led to a lack of oversight and subsequent mismanagement and misconduct by trustees. See Charity Inquiry: The Macbeth Memorial Trust.

It is possible to alter a charity's governing document, and indeed trustees should do so if the current form prevents the charity from carrying out its purposes. Charity Commission consent will be required for certain kinds of change to be implemented.  

Other key themes

• Third party fundraising: Working with commercial partners can be an efficient way for charities to raise funds, however, trustees must ensure that relevant risks are identified and managed. In one case reported this year, a charity entered into agreements with professional fundraisers without sufficient scrutiny. The costs of fundraising activities consumed almost all the money raised, the charity spending less than 1% of its funds on its purposes in the period assessed. Significant risk was imposed on the charity, as no cap was agreed on liabilities. See Charity Inquiry: Hospice Aid UK. 

• Operating for the public benefit: Charity funds must be applied for the public benefit. In one case, a charity’s funds were spent on an antique clock and renovation of a privately owned cottage. These were argued to be investments for the charity but were found to represent extremely poor value for money. The charity was concluded not to be operating for public benefit and the trustee in question was disqualified. See Charity Inquiry: The Cowesby Trust and Resham Helping Hand.

• Advancing purposes: A charity could not evidence spend on purposes that were claimed (renovation of an orphanage), instead spending money on investment properties that were not cost effective. The Commission concluded that the purposes of the charity could be better promoted if it ceased to operate and directed it to wind up. See Charity Inquiry: Resham Helping Hand.

• Safeguarding: Though the Charity Commission is not the regulator for safeguarding, it must ensure charities comply with their legal duties in this area. The Commission investigated two charities who had at the time insufficient or inappropriate safeguarding policies, particularly considering the vulnerability of some of their beneficiaries. See Charity Inquiries: Care4Calais and Watch Tower Bible and Tract Society of Britain.

• Trustee disputes: An entrenched dispute between two factions of individuals who both felt themselves to be the legitimate trustees of a charity was found to be impacting almost every aspect of their operation. This had to be referred to the High Court and, following the decision, the charity transferred its assets to a new CIO and was wound up. See Charity Inquiry: Ethiopian Orthodox Tewahdo Church St Mary Tsion.

Conclusion

Mismanagement and misconduct in administration of a charity does not always imply malicious intent. Actions, or inaction, may arise from trustees’ ignorance of the relevant law and regulations, or of the rules contained in their own governing document. Trustees may rely on employees or fellow trustees without sufficient scrutiny and participation, or break rules in the belief that this will ultimately be beneficial to the charity or their purposes.  

Trustees must remember that they are subject to a number of legal duties, and it is essential for them to familiarise themselves with these in order to ensure that their charity can deliver its purposes for the public benefit while complying with the law. Trustees should ensure that their boards contain the skills and experience required to do this effectively. 

Stone King runs free essential trustee training sessions online every month, as well as more focused training on specific topics.  We also offer governance reviews and bespoke trustee training on request. You can find a list of planned training events and information on our training programme here.