Draft Charities (Accounts and Reports) Regulations 2005
A Response on behalf of The Charity Law Association
The Charity Law Association Working Party
The Charity Law Association has over 800 members principally solicitors and barristers but also accountants and other non-professional members.
This response has been prepared on behalf of the Charity Law Association by a working party the members of which were as follows:-
Diane Scott Cancer Research UK (Director of Legal) - Chair
Trevor James Sheen Stickland (Chartered Accountants)
Heather Lamont HSBC Bank PLC (Charity Investment Services)
Dr Gareth Morgan Policy Officer, Association of Charity Independent Examiners
Sarah Morrison Littlejohn Frazer (Chartered Accountants)
Anita Sadler Bates, Wells & Braithwaite (Solicitors)
Sudhir Singh Baker Tilly (Chartered Accountants)
We confirm that we are happy for our comments to be made publicly available.
PLEASE NOTE that these comments are confined to the draft regulations relating to charities other than investment fund charities. The CLA has not prepared a specific response on the draft regulations relating to investment fund charities. However, we believe the approach adopted, of following the methods and principles of the SORP for authorised funds, is pragmatic and will help to ensure consistency with reporting by other investment entities.
Our comments on the specific consultation questions in respect of non-investment fund charities are as follows.
Question 1 – Do the Draft Regulations provide an appropriate focus within the annual report to enable trustees to explain the aims and objectives they have set for their charity and to explain the strategies adopted and activities undertaken to achieve them?
Yes, we broadly agree that this is the case although we agree with our colleagues at the Association of Charity Independent Examiners that the simplifications and exemptions for smaller charities are very important and must be clearly identified.
Question 2 – The Draft Regulations seek to enable the reader of the annual report to better assess a charity’s progress against its stated objectives. Do the Draft Regulations achieve this objective? If not, how might they be improved to achieve this objective?
The extent to which this objective is achieved will depend on the awareness and attitude of trustees, and in particular on the extent to which they are committed to openness and transparency in reporting on their charities’ progress. It will be difficult to demonstrate non-compliance with reporting requirements in this area. In many cases trustees will be able to satisfy the letter of the regulations without necessarily adopting the spirit of the reporting framework. We do not believe that textual amendments to the regulations would change this.Question 3 – Do you agree that, in the context of charities, the provision of information on the social, environmental and ethical considerations taken into account as part of a charity’s investment policies provides information relevant to an assessment of those policies by its stakeholders and supporters?
Yes, we believe this is helpful and relevant, although it is appropriate that smaller charities should be exempt from this requirement. Furthermore, we believe that larger charities should only be required to provide this information where they hold fixed asset investments of material size.
Question 4 – The Draft Regulations require the annual report to contain a description of the policies and procedures adopted for the induction and training of new trustees. Do you agree that such information will enhance the quality of governance reporting by charities?
We believe that requiring comment on this important area will encourage trustees to address the need for induction and training if they are not already doing so. We therefore welcome this requirement although it will not necessarily enhance the quality of reporting.
We believe that the method/s by which a charity recruits and appoints its trustees is of at least the same, and possibly greater, importance to governance than induction and training. We therefore urge that a corresponding requirement is included in the Regulations to report on the method of recruitment and how trustees are appointed or elected.
Question 5 – Do the Draft Regulations properly reflect the recommendations of the Strategy Unit Report, accepted by Government, in relation to charity annual reporting?
Yes, we believe they do.
Question 6 – Do you agree that the annual reporting exemptions proposed by the Draft Regulations for smaller charities should apply to all charities below any relevant statutory audit threshold?
Yes, we agree with this.
Question 7 – By adopting the methods and principles of the Charities SORP, the Draft Regulations seek to avoid the creation of a detailed and separate reporting and accounting regime within the Regulations. Do you concur with this approach?
We agree with this aim although we believe that in order to achieve it, the Regulations need to be supported by clarification and additional guidance for some groups of charities such as those reporting on a receipts and payments basis, and ‘special case’ charities. We have commented further on these areas under Question 12 and under ‘additional comments’ below.
We note that the Regulations refer to a specific version of the SORP, identified by date of issue. In view of the increasingly frequency with which the SORP is likely to be revised in future years, we think it would be more practical for the Regulations to refer to whichever version of the SORP is currently endorsed by the Accounting Standards Board.
Question 8 – Do you agree that a requirement to provide particulars of support costs incurred by a charity is necessary to provide users of accounts with an understanding of such costs in the context of an activity cost disclosure within the SoFA?
Yes, depending on the size of the charity it will be necessary to provide particulars of support costs to allow understanding. However, we agree with the draft SORP that non-auditable charities may find the analysis excessively burdensome and should be allowed to adopt a natural classification of costs.
Question 9 – Do you agree that a requirement to provide an analysis of expenditure on charitable activities is necessary to provide users of accounts with an understanding of the services, programmes, projects or other initiatives that may be included within this category of expenditure?
Yes, this should be analysed across activities.
Question 10 – Are there any other matters that arise in relation to the reporting and accounting framework in which charities operate that you feel should be addressed in the new Regulations?
10.1 We believe that smaller charities should have the same flexibility to adopt different income classifications that the Regulations afford them for the reporting of expenditure.
10.2 We would like to see some provision in the Regulations for the preparation of group accounts by charities and their subsidiary and associated undertakings, so that the activities of the group as a whole could be reported as well as the results of individual charities. This would be consistent with attempts to streamline the regulation of charities.
Question 11 – Do you have any comments about the Regulatory Impact Assessment (RIA) that accompanies this consultation at Annex B? Does it present a sound analysis of the costs of compliance for charities and the benefits the regulations will bring?
We welcome the RIA and its recognition that the cost to charities of implementing the new Regulations does not arise simply from direct costs. Like the Association of Charity Independent Examiners, we believe that the opportunity costs and indirect costs arising from the Regulations are likely to be higher than suggested by the RIA, but not to the extent that we would discourage implementation of the new Regulations.
Question 12 – Do you have any comments or suggestions on the drafting of the Regulations as they apply to general and special case charities as set out in Annex A?
12.1 Under the draft Regulations, smaller charities would be exempt from the requirement to disclose the existence and cost of any trustee indemnity insurance taken out by the charity on behalf of its trustees. We do not believe that this exemption is appropriate or necessary: the burden of making such a disclosure is negligible, and we consider this a significant piece of governance disclosure.
12.2 Our understanding is that many special case charities will (as at present) follow a specialist SORP in respect of the form and content of their financial statements, but will also be subject to the requirements of these Regulations for disclosures under the annual report.
If this is the case, we believe this could usefully be clarified by referring in draft Regulation 5 to the fact that where a more relevant specialist SORP exists, a charity should follow that one for the form and content of the statement of accounts, but that the annual report requirements under draft Regulation 11 still apply.
ADDITIONAL COMMENTS
General comments
We welcome the consolidation of the 1995 and 2000 regulations into a single document for clarity and simplification.
While we do not resist changes to reporting requirements simply because of the additional burden imposed as a result, we would urge the regulators to be mindful of the effect of changes such as the proposed analysis and presentation of support costs. We hope the regulators will ensure that such changes now and in the future are only imposed if the benefit can reasonably be argued to outweigh the associated burden.
We agree with the ACIE on the importance of making clear that charities preparing receipts and payments accounts, while not following the format for statements of accounts described in the regulations, are still subject to the regulations in relation to their annual reports and requirements for independent examination or audit. The issuing and publicising of separate guidance specifically for these charities would be an effective way of clarifying this.
We would like to see the revision to the Regulations used as an opportunity to reorder the disclosure requirements and update terminology as necessary so that the ‘annual reports’ section of the Regulations follows the same order and is consistent with the related section of the SORP.
For example:
the SORP refers to reporting on volunteers where ‘significant use’ is made of them; draft regulation 11 makes no reference to their significance
the SORP refers to reporting on an ‘ethical investment policy’; the draft regulations refer to ‘social, environmental or ethical considerations’
the SORP calls for a ‘summary’ of the charity’s objects, the draft Regulations for a ‘description’
the SORP calls for trustees to describe the progress made in pursuing the aims and objectives they have set; the draft Regulations merely require a description of the aims and objectives the trustees have set for the charity ‘in the future’
Comments on specific items
Draft regulation 6(2)(a) and 6(4) – these clauses both contain references to transitional provisions in specific financial years which we believe are now unnecessary.
Draft regulation 7(5) – in the context of the auditor’s duty to report to the Commissioners in a ‘whistleblowing’ capacity, we believe the meaning of the word ‘immediately’ should be clarified either in the Regulations, or by reference to the Proceeds of Crime Act and/or the Money Laundering Regulations. The requirement on auditors described in this clause should also be consistent with Auditing Standards.
Draft regulation 11(3)(c)(i) – for the avoidance of doubt and for consistency with the SORP, we believe this requirement to refer to funds in deficit should apply only to material items.
Draft regulation 11(4)(p) – the use of the term ‘income reserves’, retained from the 2000 Regulations, is confusing in the context of subsequent Commission guidance and pronouncements on the use of a ‘total return’ basis for investing charities. We would suggest that the word ‘income’ be dropped here and in the definition given under draft regulation 2.
A more common term is ‘free reserves’, which explicitly exclude ‘designated funds’ as defined in the SORP and referred to in Charity Commission guidance CC19. It is not clear whether the use of the word ‘designated’ in draft Regulation 11(4)(p) is intended to have the same specific meeting as in the SORP. It would be helpful if the definition and terminology used in the Regulations could reflect that in these other sources.
The consultation document refers (see pages 21 and 25) to financial years beginning on or after 1 March 2006. This may be a simple typographical error. Our understanding was that implementation would be required for accounting periods beginning on or after 1 March 2005.
