What should charity audit committees ask about financial reporting?
Plus: guidance on sponsorship; church fetes and VAT; and cyber security
HM Revenue & Customs has updated its recently revised guidance on sponsorships to deal with situations in which sponsorships and donations are combined. The principles have not changed: donations are outside the scope of VAT as long as they are genuinely donations and any documentation backs that up. Two separate agreements are an obvious answer. The guidance includes two short examples covering retailers allowing customers to vote on which charities will receive donations, and in which a business agrees to promote giving by its employees and customers to a charity. It is another reminder that the tax aspects of fundraising need careful thought.
Making Tax Digital
Who would have thought that church fetes could get so complicated? With the advent of Making Tax Digital, HMRC has provided help in reducing the burden of digital record-keeping while presumably serving cups of tea in the pouring rain: "A church fete is being run for a charity. During the event the volunteers create a record of the supplies made. When the event is over, the charity can record the total supplies made at the same rate of VAT and with the same tax point as a single entry in their functional compatible software and they can record all supplies received as a single entry in functional compatible software." Vicars everywhere will be sighing with relief.
The Institute of Chartered Accountants in England and Wales, in association with the Financial Reporting Council, has issued a guide setting out practical tips and questions for audit committees to consider in relation to financial reporting. This is in the context of increased interest in the role of these committees, and the guide is targeted at smaller listed and AIM stock exchange-quoted companies. Since the rationale for the guidance is increased public interest in such companies, it can also be applied to charity trustees with similar responsibilities.
The guidance is straightforward and practical. It suggests, for example, that boards focus on areas that are of general interest to all investors. In charities, that might perhaps equate to topics such as reserves and fundraising expenditure. It also includes some specimen questions, such as those below, for the external auditor in a private meeting.
- Does management generally address issues raised during the audit?
- What aspects of the financial statements and associated notes need improving?
- Have these issues been identified previously?
- Have you discussed your views with the finance director and other executive directors?
- How do we compare in this area to other companies of a similar size?
The Charity Commission has pointed out that the government’s recent Cyber Security Breaches Survey 2018 revealed that more than two-thirds of high-income charities recorded a cyber breach or attack in 2018. Of those charities affected, the vast majority – more than 80 per cent – had experienced a phishing attack. With the cost of a breach ranging from £300 to £100,000, charity managers cannot afford to ignore the growing threat posed by cyber crime, in all its forms. The National Cyber Security Centre has produced a useful guide on how to protect yourself from cyber crimes and how charities can become accredited under the government's Cyber Essentials Scheme. The Charity Commission also reminds charities that cyber crime or fraud should be reported to Action Fraud and to the regulator itself as a serious incident.
Having just issued its guidance on charities’ links with non-charitable organisations, the Charity Commission reports a case in which a charity diverted funds to a non-charitable organisation with little or no audit trail to show how charitable funds had been spent overseas. Instead, the charity relied on photographs and social media messages to show its work undertaken abroad. Charities need to have robust systems to ensure that funds passed to other organisations are properly applied: this is to avoid breach of trust and tax penalties, and to ensure funds are not used for criminal or terrorist purposes.
Office of the Scottish Charity Regulator
People might be confused, or excited, by the OSCR announcing that it has updated its guidance on the legal requirements for charity accounts and any external scrutiny. However, the reason for the update is nothing more significant than the regulator trying to help charity trustees better understand the requirements. OSCR points out that all trustees are responsible for the charity's accounts, even if they are not accountants or financial experts. At the same time, the guidance for independent examiners has been updated to make them clearer, and a guide has been produced for charity trustees to better understand independent examination.
This article was first published on 5 June 2019 in Third Sector.