CONSULTATION ON THE REVIEW OF SCOTTISH CHARITY LAW : ANALYSIS OF THE RESPONSED
CHAPTER SEVEN
THE REGULATION OF SCOTTISH CHARITIES I: REPORTING, MONITORING AND ACCOUNTABILITY
7.1 Issues related to reporting, monitoring and accountability largely follow the numerical sequence in the recommendations of the Commission. This chapter considers Recommendations 32-42, with the further addition of Recommendation 28.
REPORTING AND ACCOUNTABILITY
Recommendation 32
We recommend that:
- all charities should in principle prepare financial statements which give a true and fair view
- CharityScotland should have discretion to exempt smaller charities, as a group, from preparing financial statements subject to return of a proforma annual return
- the current charity accounting regulations should be amended to reflect the above recommendations.
7.2 Under the current law, most charities are required to keep accounts. Designated Religious Bodies are exempt, as are charities which are subject to the requirements of the Companies Acts. This recommendation proposes a different regulatory regime. This recommendation attracted a relatively high level of disagreement (17%), although just under half (49%) of the respondents agreed with it.
7.3 This recommendation caused some confusion: as the Church of Scotland points out in the comment which follows, there were two versions of the recommendation in the report, which said substantively different things.
The wording of the second bullet point of Recommendation 32 on page 35 differs from the wording of Recommendation 32 on page 101 (Annexe J). Which is the correct wording? The recommendation on page 35 would give discretion to exempt smaller charities from having to prepare any financial statements, while the recommendation on page 101 would only exempt smaller charities from having to prepare financial statements which give a true and fair view. The Board's view is that all charities should have to prepare accounts but that smaller charities should be allowed to prepare simplified accounts, not requiring to show a true and fair view. We therefore support the version of Recommendation 32 contained on page 101. (Church of Scotland)
The "true and fair view"
This is probably accounting jargon, but on the face of it seems odd. What value would there be in accounts that do not give (in the lay sense) a true and fair view? (Friends of the Ochils)
The Appendix to the Foreword to Accounting Standards has a discussion on the true and fair requirement by Mary Arden (accessible from the ASB website www.asb.org.uk). It would be helpful to reproduce this to help explain the application of true and fair view and how it evolves. (Institute of Chartered Accountants in Scotland)
Exemption for smaller charities
7.4 There was some support for this, though the numerical analysis indicates less support than for other recommendations. However, most of the specific comments on this proposal opposed the idea of exempting any charity.
7.5 A further problem is indicated by the comments about abuse in relation to charities affiliated to complex networks; it may become possible to avoid accounting regimes by fragmenting the operations of an organisation into multiple small charities. The adoption of the SORP statement of accounting practice may help to prevent the potential for abuse through the fragmentation of activities.
Recommendation 33
We recommend that:
- smaller charities should not be required to have their accounts independently examined, but we recommend that one of the trustees should be required to sign off these accounts
- middle-ranking charities should be required to have an independent examination of their accounts
- the biggest charities should be required to have their accounts professionally audited.
Recommendation 33 proposes that the accounts of smaller charities need only be signed off by one of the trustees. This is clearly a nonsense if smaller charities do not have to produce accounts at all (as per recommendation 32) (Church of Scotland).
7.6 While the principle was welcomed that different sizes of charity should have different requirements, there were concerns about the exemption of smaller charities, which might open the system to abuse. About half (51%) of the respondents agreed with the recommendation, although 13% disagreed. Over one third (36%) gave no view. Several respondents felt that there should always be independent scrutiny, irrespective of the size of the charity. The definition of "small", "middle ranking" and "large" charities was unclear, and required clarification. Several respondents suggested higher levels of safeguard than those proposed.
Recommendation 34
We recommend that CharityScotland should have the power to dispense with an audit requirement contained in any founding document, where it is more onerous than the normal requirements for a charity of that size.
7.7 If Recommendation 33 is adopted, some charities would be exempt from the requirement to provide audited accounts. The most likely variation from a founding document or constitution would therefore be a requirement to produce independently audited accounts. This recommendation sought to avoid the situation where the regulator excuses the production of such accounts but the charity is bound to produce them regardless. Reaction was mixed, reflecting differences in relation to Recommendation 33 as well as specific reservations about the principle of removing a founder's conditions. About half (52%) of the respondents agreed with the recommendation; 7% disagreed and 41% gave no view.
Recommendation 35
We recommend that a duty be placed on auditors to report any matters of concern to CharityScotland and to raise such matters with the charity trustees.
7.8 Over half (57%) of the respondents broadly agreed with the recommendation and 5% expressed disagreement. Nearly two fifths (39%) gave no view. A number of respondents suggested that matters of concern should be raised with the trustees (or appropriate governing body) to allow them time to address these matters before they are reported to CharityScotland. As many auditors (and independent examiners) for charities operate on a voluntary basis, there was also some concern about the additional duty to be placed on the auditors. Some suggested that the recommendation should be limited to serious matters of concern, but that still would not relieve the auditor from their duty to ascertain whether a report should be made.
Recommendation 36
We recommend that the Accounting Standards Board (ASB) should take over responsibility for the review of the SORP and that CharityScotland should be involved in any review affecting charity accounting.
Many volunteer treasurers have no accounting experience and to them the Statement of Recommended Practice-"Accounting and Reporting by Charities" is an incomprehensible and off-putting document (around 90 pages of highly technical accounting terminology). (Church of Scotland)
7.9 Fifty five per cent of respondents agreed with the recommendation and 43% gave no view. The Institute of Chartered Accountants in Scotland felt that the ASB had the issue covered; other respondents, including the RSPB and the National Trust, felt that the ASB did not take adequate account of the circumstances of charities.
Recommendation 37
We recommend that on an annual basis, Scottish Charities should report to CharityScotland using annual returns prepared by that office.
7.10 Just over half (51%) of the respondents agreed with the recommendation; over one third (36%) gave no view and 13% disagreed. Several respondents felt this proposal was excessively bureaucratic, or that their existing procedures were quite enough. There was a general request to keep the paperwork to a minimum.
Recommendation 38
As a guide, we recommend that charities which have assets of more than 100,000, employ any staff or have an income above 25,000 per year should be required to complete and return the full annual return. Smaller organisations might be required to complete only an abridged version.
7.11 This recommendation makes the third distinction in the report offered between smaller and larger charities. Recommendation 32 suggests exemptions for small charities from reporting; Recommendation 33 uses a different classification in relation to audit. A charity which is "smaller" for the purposes of this recommendation would not necessarily be "small" on the criteria used for the other recommendations. While 50% of respondents agreed with Recommendation 38 and 40% gave no view, 10% of respondents disagreed. The principle behind this distinction was questioned here, as it was in relation to the other recommendations.
Recommendation 28
We recommend that CharityScotland should have a power to review the reporting structure of Scottish Charities and exempt, from reporting and accounting to it, any which appeared to be sufficiently well regulated elsewhere.
7.12 Because this recommendation appears in an unrelated section of the report, it is possible to miss its importance in relation to accountability. It offers discretionary exemption from the structure of accountability outlined in other recommendations considered in this section. Several respondents welcomed this, but others felt there was a possibility of preferential treatment, which had to be countered by precise criteria. Just under half (47%) of the respondents agreed with the recommendation' 45% gave no view and 8% disagreed. BTCV questioned the principle:
This is the same argument as is used to justify exempt charities in England and Wales from registration with the Charity Commission. It is widely accepted that the alternative regulating bodies in some cases take little or no interest in the observance of charity law by those organisations registered with them, and that this routinely leads to abuse of charity law. We do not accept that educational, housing, medical or religious authorities, for example, are generally competent to regulate charity law. (BTCV)
Recommendation 39
We recommend that CharityScotland should be required to provide the public with copies of a Scottish Charity's annual returns if so requested and that this obligation should be removed from Scottish Charities themselves.
7.13 Just over half (51%) of the respondents agreed with the recommendation; about two fifths (41%) gave no view and 8% disagreed.
What happens if charities fail to supply returns to CharityScotland? Will members of the public be informed of this? And what is the remedy? (Dr C Barker)
Recommendation 40
We recommend that a computer-based database of charity records should be established by CharityScotland and that the general public should have access to this database through the Internet. In addition, we recommend that the public should be permitted access to the paper versions of annual returns of Scottish Charities, if so desired.
Public to be real individuals and not companies trying to make money out of charity listings. (Cowane's Housing Association/ Patrons of Cowan's Hospital/Patrons of Spittal's Hospital/Rent Deposit Guarantee Scheme)
7.14 Over half (53%) of the respondents agreed with this recommendation; 40% gave no view and 7% disagreed. Some respondents were concerned about confidential data:
What about the Data Protection Act? Trustees may require privacy. Can protection be given to charities from malicious enquirers? (Portobello Spiritualist Church)
MONITORING
Recommendation 41
We recommend that CharityScotland should use the annual returns it receives to undertake preventive and systematic monitoring.
7.15 While the majority (51%) of respondents agreed with the recommendation, 42% gave no view and 7% disagreed. Several respondents felt this was too intrusive; others that it was unlikely to be effective in dealing with fraud.
We would not want to see "performance" monitoring against a set of standards not necessarily applicable to every charity. Bureaucracy is the bugbear of all small charities. Preventive monitoring would be welcome on a realistic and commonsense basis, but "systematic" monitoring smells very much of bureaucratic interference. (Abbeyfield Aberdeen Society)
Recommendation 42
We recommend that failure to provide information by the deadlines requested by CharityScotland might be used as a marker to trigger a review of the Scottish Charity.
7.16 Some respondents felt this was harsh, but both the nature of "review" and the possible form of sanctions were unclear. Over two fifths (43%) gave no view on the recommendation; 3% disagreed and 54% agreed
A formal review or inquiry, in the experience we have of English charities, undoubtedly slows down a charity's momentum, distracts personnel from the main purpose of fulfilling the objects and raising funds and depresses morale. (Charity Law Association)
SUMMARY
7.17 The report suggests some relaxation of rules for smaller charities, but there is no consistent definition of what a smaller charity is. There are further proposed relaxations for organisations which meet standards set by other institutions. The reaction to these proposals was mixed; while welcoming the opportunity for less reporting, some respondents were concerned about the possibility of abuse. The centralisation of records fuelled fears of increased paperwork. The proposed use of reports for monitoring also excited some concern about the nature and level of intervention.
7.18 Points for consideration arising from the consultation responses included:
- what the dividing line might be between small, middle ranking and large charities
- whether exempting certain sizes of charity may lend itself to abuse by the use of affiliate structures.