Charity Commission Inquiries: what we learnt in 2021

The most common theme throughout the Commission’s 2021 statutory inquiries was, comfortably, the need for charity trustees to ensure that their charities exercise adequate financial controls. 

Internal financial controls are “essential” – in the words of the Commission in its guidance on financial controls – to charity trustees so that they can:

1. Meet their legal duties in respect of safeguarding charity assets;
2. Identify and manage risk in the administration of charity finances; and
3. Keep adequate accounting records.

In addition to the Commission’s guidance, they have also published a helpful checklist which we would suggest that all charity trustees review to assess whether their charities’ financial controls are adequate and, if not, take remedying actions and consider seeking professional advice where needed.

Unfortunately, the Commission’s inquiry reports from 2021 suggest that a number of charities do not operate appropriate financial controls, with issues arising such as:

• Failing to submit annual accounts to the Commission within 10 months of the end of a charity’s financial year;
• When operating overseas, not complying with local financial regulations in respect of, for example, tax;
• Taking out loans with connected parties without appropriate loan agreements having been entered into;
• Having no internal financial reporting mechanisms and a lack of financial control procedures aimed at protecting the charity’s assets from risk;
•  A lack of separation between personal finances of the charity trustees and the charity, such as personal use of a charity credit card; and
• Lack of appropriate financial oversight from external auditors – especially relevant for larger charities with significant assets.

These are just a few examples of the types of issues charity trustees can experience in respect of financial controls, and we would encourage all trustees to re-familiarise themselves with the Commission’s guidance to ensure that they are comfortable with their charity’s financial control procedures. Trustees should also remember that it is they who are ultimately accountable for their charity’s financial controls, even if they delegate financial matters to others.

Another very common theme from the Commission’s 2021 statutory inquires was the non-compliance of charity trustees in respect of managing conflicts of interest. 

There are two common types of conflicts of interest which charity trustees should be wary of: financial conflicts, relevant in situations where trustees are entering into any kind of financial transactions with the charity, or are being paid for carrying out their trustee role (other than expenses); and loyalty conflicts, where a decision made by the charity involves a person or organisation who is linked to a trustee, such as another charity that person is a trustee of.

The Commission’s guidance on conflicts of interest should be referred to by charity trustees to refresh their knowledge on the legal requirements. Helpfully, the Commission summarise how trustees should handle conflicts of interest using the following three key steps:

Step 1: Identify the conflict of interest, noting that each trustee has personal responsibility to declare relevant conflicts.
Step 2: Prevent the conflict of interest from affecting the decision, for example, by pursuing a different course of action or proceeding with the issue in a different way.
Step 3: Record the conflict of interest and how it was managed by the trustees.

Some examples from the Commission’s 2021 inquires where conflicts of interests were not adequately dealt with include:

• Charity trustees being involved in related party transactions in respect of the provision of goods and services to the charity without appropriate procedures being followed;
• Charity trustees not recording, by way of meeting minutes, where conflicts of interests were allegedly discussed and managed;
• Charities not having a conflicts of interest policy at all; and
• Charity trustees not complying with the terms of the charity’s governing document in respect of absenting themselves from decisions where it is possible that a conflict of interest could arise.

These mistakes highlight how important it is that trustees familiarise themselves with their legal obligations in respect of conflicts of interest and, where appropriate, seek professional advice. The Charity Governance Code provides a useful framework and recommended practice when it comes to managing conflicts.

Working with commercial partners can be an extremely efficient way for charities to raise funds. However, charity trustees must ensure that relevant risks are identified and managed to ensure that (in accordance with the Commission’s relevant guidance):

1. Any agreements with commercial partners are in the best interests of the charity;
2. Such agreements do not excessively remunerate the commercial partner (in the context of the money raised); and
3. All legal requirements are satisfied, including: ensuring that there is a written agreement in place; paid staff declaring their status by way of a soliciting statement; and detailing such agreements in the trustees’ annual report (larger charities only).

Non-compliance with the above trustee duties in respect of commercial participator agreements arose a number of times throughout the Commission’s 2021 statutory inquiries, which included the following examples:

• Not taking adequate legal or accountancy advice in respect of entering into long-term commercial participator agreements;
• Failing to carry out sufficient due diligence on the commercial participator company;
• Trustees not carrying out any negotiation as to the terms of a commercial participator agreement and simply accepting the terms first offered to the charity;
• Not recording justifications and reasoning in respect of the trustees’ satisfaction that the agreement was in the best interests of the charity; and
• Not entering into a written agreement with a professional fundraiser.

Issues with commercial participator agreements seem to be a common feature of inquiry reports; and this highlights the need for trustees to familiarise themselves with the relevant Commission guidance before entering into such an agreement and take professional advice where necessary.