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Briefing for Council Members of The British Academy’s Sponsored

Institutes and Societies

Ian Mathieson – Partner, PKFJulia Poulter – Senior Manager, PKF

23 January 2013

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Introductions

Ian Mathieson

Audit Partner

Julia Poulter

Senior Audit Manager

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Objective

To give an overview of:

• Duties and responsibilities of a charity trustee

• The Hallmarks of an Effective Charity and Principles of Good Governance

• Relationship with the British Academy as a funder

• Charity reporting and accounting requirements

• Good financial management indicators for trustees in the current economic environment

• Keep on your radar

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Over 162,000 registered charities with total income of just over £58 billion

*Charity Commission website (at December 2012)

The Charity Sector – putting the numbers into perspective

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Charities by Annual Income

Latest published figures at 31 December 2012

The Charity Sector – putting the numbers into perspective

Annual income bracket

Number of charities

% Annual income

£bn

%

£0 to £10,000 69,485 42.6 0.230 0.4

£10,001 to £100,000 53,056 32.6 1.877 3.2

£100,001 to £500,000 20,015 12.3 4.453 7.6

£500,001 to £5,000,000 8,115 5.0 12.217 20.9

£5,000,000 plus 1,831 1.1 39.703 67.9

 SUB-TOTAL 152,502 93.6 58.480 100.0

Not yet known 10,413 6.4 0.000 0.0

 TOTAL 162,915 100.0 58.480 100.0

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Duties and Responsibilities

of a Charity Trustee

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Trustees should:

• Govern and not manage

• Delegate but not abdicate

A couple of maxims

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What is a Charity Trustee?

• Charity Trustees are the people who have the general control and management of a charity’s administration

Trustee duties and responsibilities

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Responsible for:

• Directing affairs of the charity

• Ensuring its solvency

• Delivering the charity’s objectives for the benefit of the public

Compliance

• Charity law and regulation

• Charitable objects; governing document

• Other applicable law and regulation

Trustees must act with integrity, avoiding personal conflicts of interest or misuse of charitable funds

•you should check the charity’s governing document for provisions relating to conflicts of interest

Charity trustees’ duties

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Charity trustees’ duties (cont…)

Duty of prudence

• Ensure continuing solvency of charity

• Apply income to fulfil objects; using funds wisely

• Avoid undue risk

• Take special care when investing or borrowing funds

Duty of care

• Use reasonable care and skill

• Take professional advice –(if material risk or breach of duty)

(CC3 - The Essential Trustee: What you need to know)

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Summary:

• Charity’s assets are used only for charity’s purposes• Act reasonably and prudently• Act solely in the interests of the charity• Avoid conflicts of interest• Act collectively• Ensure good governance• Safeguard assets• Manage investments in accordance with the Trustee Act 2000• Set the policy and direction• Oversee implementation• Monitor outcomes

Trustees’ duties and responsibilities

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Trustees’ duties and responsibilities

• Trustees are responsible for the vision, mission and overall management of the charity. They are accountable if things go wrong.

• However, Trustees are able to and should delegate in certain circumstances.

• Trustees must comply with ground rules when delegating power.

Trustees must accept ultimate responsibility for everything the charity does:

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• Decisions and responsibilities are shared, so all Trustees should take an active role

• However, ALL Trustees are collectively responsible for decisions made by the Trustees

• Whilst Trustees may have different roles (e.g. Chair) responsibility for decision-making still lies with the board as a whole

Trustees have a duty to act collectively

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Trustees are responsible for the proper administration of the charity.

They must make sure that:

• the charity’s assets and resources are used only for the purposes of the charity

• the charity is run in accordance with its constitution, charity law and all other laws and regulations which affect its activities

Trustee duties and responsibilities

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• Trustees must “exercise such care and skill as is reasonable in the circumstances”

• The duty will be greater if a Trustee has (or claims to have) any special knowledge or experience, or if their business or profession means they can reasonably be expected to have special knowledge or experience

Trustees’ duties and responsibilities

Trustees to act reasonably and prudently in all matters relating to their charity:

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• Reputation: A charity must recognise that its name and reputation are valuable

• Risk management: Trustees are expected to identify risks and decide how they should be managed

• Guard against fraud and mismanagement: Trustees should put proper financial procedures in place

Safeguard the assets of the charity

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• Trustees can recover reasonable out of pocket expenses

• Except in certain specified circumstances - Trustees can’t receive any benefit from a charity

• Exceptions:-

- Charities Act 2006- Authorisation from the Charity Commission or the court

• CC 11 - Trustee expenses and payments

Trustees and payment

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Trustees’ expenses and payments

• Recommendations:

–Written policy for expenses

–Complete expense claims with receipts

–Clarify any fixed payments

–Set caps for e.g. hotels, travel

–Include senior employees and volunteers

–Ensure communicated and part of induction

–Set authorisation limits and rules

–Minimise use of cash

–Mileage – use HMRC rates to avoid tax / NI issues

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• Trustees should not allow their personal interests or views to override this: they must exercise independent judgment

• Conflict of interest rules mean that charity Trustees have:

- A duty to avoid a conflict of interest situation- A duty to disclose a potential conflict of interest

- A duty to manage an actual conflict of interest

Trustees must act in the best interests of the charity

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• Declaration Form on appointment

• Annual Review

• Maintaining a register of potential conflicts of interest

• Declaration at meeting

• Quorum

• Remaining and speaking

• Voting

Managing conflicts

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• Any liabilities that they incur as trustees can normally be met out of the charity’s resources if trustees act

• Prudently• Lawfully• In accordance with the governing document

• If trustees act imprudently, or are otherwise in breach of the law or the governing document, trustees may be personally responsible for liabilities of the charity or for making good any loss

• The Charity Commission has powers to take proceedings in court for the recovery, from trustees personally, of funds lost to charity as a result of a breach of trust by the trustees

Liabilities of Trustees – Breach of Trust

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• Protects Trustees against claims made against them personally

• Can cover- breach of trust;- breach of duty; or- negligence committed in capacity as trustee

• Policy cannot cover- For criminal fines or penalties;- Trustees costs in defending criminal proceedings if

he or she is convicted of fraud, dishonesty or reckless conduct; or

- Where the liability results from a deliberate disregard of the interests of the charity

• CC49 Charities and insurance

Trustee indemnity insurance

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Charity Commission guidance

• Charity Commission : www.charitycommission.gov.uk

• CC3 – The Essential Trustee : What you need to know

• CC10 – Hallmarks of an effective charity

• CC11 – Trustees expenses and payments

• CC19 – Charities and reserves

• CC26 – Charities and Risk Management: A guide for trustees

• CC30 – Finding new Trustees

• CC36 – Changing your Charity's Governing Document

• Easy Read guidance – Being a Trustee

• Protecting charities from harm – an online trustee toolkit

• Reporting Serious Incidents – Revised guidance for trustees (December 2012)

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Useful websites

• NCVO : www.ncvo-vol.org.uk

:www.ncvo-vol.org.uk/governanceandleadership

• ACEVO : www.acevo.org.uk

• Charity Finance Group : www.cfg.org.uk

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What are the hallmarks of an effective charity?

What are the principles of good governance?

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An effective charity

• Is clear about its purposes and direction –Uses clear purposes, mission & values to direct its work

• Has a strong board –right balance of skills & experience; acts in the best interests of the

charity and beneficiaries; understands its responsibilities, with systems allowing it to exercise them

• Fit for purpose–Structure, policies & procedures enable charity to achieve its

purposes & mission and to deliver its services efficiently

• Learning and improving

• Financially sound and prudent–in a transparent and understandable way

• Accountable and transparent

(CC10 - Hallmarks of an effective charity)

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• Consider balance of skills on the Trustee Board

• Good practice for new Trustees to confirm that they are legally qualified to be a Trustee (e.g. not convicted of an offence involving dishonesty or deception, undischarged bankrupt)

• Proper induction

• Sign Trustees Code of Conduct

Recruitment of Charity Trustees

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Some thoughts:

• Provide social forums for board members to get to know each other

• Make sure everyone has easy access to organisational documents

• Make processes transparent

• Coach individuals to voice concerns in a constructive way

• Distribute leadership across the board

• Provide opportunities to share accomplishments

• Provide opportunities to share concerns with the Chief Executive

• Have ongoing communications

What does a successful Board look like?

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• Mine the rich experience of your board members: utilise strengths and skills

• Encourage lively and challenging discussions

• Clarify roles and responsibilities of the board collectively and individually

• Be clear about expectations associated with board membership

• Clarify the level of time commitment required for board membership and take attendance at meetings seriously

Engage your board members

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“The systems and processes concerned with ensuring the overall direction, effectiveness,

supervision and accountability of an organisation.”

(Governance of Voluntary Organisations,)

Governance

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• Understanding of role

• Ensuring delivery of

organisational purpose

• Working effectively as

individuals and a team

• Exercising effective control

• Behaving with integrity

• Being open and accountable

Key principles of good governance

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Big Board Talk – Updated December 2012

15 questions trustees need to ask

Checklist is organised into 4 broad areas:• Strategy – opportunities and risks• Financial health• Governance• Making best use of resources

Charity Commission Guidance

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Relationship with The British Academy as a funder

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The British Academy

Is:

• established by Royal Charter and

• a registered charity–purposes: education/training, arts/culture

The Council Members/Trustees are therefore subject to:

• UK charity and trust law

The British Academy is governed by its Charter and Byelaws

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“… the promotion of the study of the

moral and political sciences,

including

history, philosophy, law, politics and economics,

archaeology and philology.”

The objects of the Academy are:

For the benefit of the public

What is the British Academy for…?

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“The fundamental purpose of the Academy is: to inspire, recognise and support excellence and high achievement in the humanities and social sciences, throughout the UK and

internationally, and to champion their role and value”

Fellowship –takes a lead in representing humanities and social sciences

Learned society–fosters and promotes the full range of work that makes up the

humanities and social sciences

Funder –supports excellent ideas, individuals and intellectual resources

in the humanities and social sciences

National forum –supports a range of activities and publications which aim to

stimulate curiosity to inspire and develop future scholars, encouraging appreciation of the value of these disciplines.

How does it achieve this mission today?

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Your relationship with The Academy

• Compliance within the terms and conditions of the grant

• Funds spent on the purposes given for

• Effective stewardship of those funds

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Charity reporting and accounting requirements

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• Legal framework: SORP 2005, Charities Act 2011, Companies Act 2006, your governing document

• Administrative details

• Structure, governance and management–recruitment/appointment of trustees–induction/training–how decisions are made–risk statement

• Objectives and activities

• Activities described linked to Statement of Financial Activities

• Policies (for reserves, investment and grants) and linkage to risk statement

• Achievements and future plans

• Give good news, and bad

• Public benefit

Charity reporting by trustees

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Charity trustees public benefit duties

Charity trustees must: 

• Ensure that they carry out their charity’s aims for the public benefit

• Have regard to guidance published by the charity commission on public benefit; and

• Report on their charity’s public benefit in their Trustees Annual Report.

• Revised guidance expected early 2013

Public benefit

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Serious incident reporting – Dec 2012

• Serious incident reporting– Updated guidance from the Charity Commission

– Trustees have a legal duty to report

– Trustees should report on a timely basis (i.e. not wait until annual return)

– Updated summary of what is a “serious incident”• Significant financial loss• Serious harm to beneficiaries• Misuse of charity funds• Illegal activity involving the charity• Other “significant” non-compliance

– If in doubt, trustees should report

– Often CC/OSCR take no additional action where trustees can demonstrate resolution

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Charity accounting

• Legal framework: SORP 2005

• Statement of Financial Activities (SoFA)

• Charitable income and expenditure linked through activities (and linked to trustees’ report)

• Balance sheet

• Accounting policies

• Transactions with trustees (related party transactions)

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Heritage assets –Financial Reporting Standard 30

• Applicable for years ending after 31 March 2011

• Greatly increased disclosure

–Five year summary

–Management of assets

• Assets should be capitalised where possible

–Donated assets

–Relaxed valuation requirements

• Where assets are excluded:

–Must be able to justify it

–Obtain justification for audit file

–Explain in financial statements

• Currently capitalised assets must remain on balance sheet

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Heritage assets – five year summary

2011 2010 2009 2008 2007

£'000 £'000 £'000 £'000 £'000

Additions

Purchases 20 100 15 1,205 340

Donations 100 40 - 12 -

Total 120 140 15 1,217 340

Carrying value of sold assets - 30 - - 605

Sales proceeds - 47 - - 1,350

Impairment recognised in period - - - 68 -

Distinguish between transactions reported in balance sheet and those not included

If earlier information not available, give current and prior year. Build up to five years by 2014.

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• Charities do pay tax – or do they??–Direct tax

• Non primary purpose activities, including trading

–VAT

–Property transactions

• Trading subsidiary

• Tax emerging issues

–Real time information

–Updated Gift Aid forms

–Small Charitable Donations Bill

–Charities Online

• Ask your professional advisors if you have any queries

Taxation

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Future of UK GAAP – common questions

• “I’ve heard that charities will be adopting IFRS in the near future. When is this happening?”

• Key point: Only entities currently required to adopt IFRS will (continue) to be required to do so in the future.

• Other entities will use FRS 100, 101, 102 (new UK accounting standards) or FRSSE (where currently permitted)

– FRS 102 broadly based on IFRS for SMEs but is not an international standard

• Effective date is periods commencing on or after 1 January 2015

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Future of UK GAAP – common questions

• “Will there still be a charities SORP?”

• Yes, the FRC have stated that there will be a continuing need for SORPs in the NFP sectors (charities, RSLs, education)

• All SORPs are undergoing or about to undergo a redraft to take account of the new requirements

• Expected consultations in 2013

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Future of UK GAAP – common questions

• “What are the changes?”

• FRS 102 is based in principals consistent with IFRS but significant accounting options currently allowed under UK GAAP continue to be allowed

• Some debates on-going regarding:– donated stock : likely to be permitted to account for

donated stock on sale of the stock and not on receipt

– restrictions vs performance conditions : some conflicting information/confusion in current draft

– merger accounting : permitted for PBEs

– accounting for pension scheme arrangements : losses and DB schemes

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New Annual Return

• New Annual Return–Updated to reflect the results of a public consultation

–additionally will be asked• if the charity is registered for Gift Aid;• whether the charity owns or leases any land or

buildings; and• whether any of the charity’s land or buildings are used

for the charity’s purposes.

–Meanwhile, previously voluntary questions are now mandatory

• on overseas activities; and• the number of volunteers.

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Good financial management indicators for Trustees in the

current economic environment

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Some wise advice

“It is not the strongest of species that survives, nor the most intelligent, but the one that is most responsive to change.”

Charles Darwin

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Good financial management indicators for trustees?

• Cashflow

• Going concern

• Scenario planning

• Internal controls – fraud risk factors

• Reserves policies

• Signs of operational stretch

• Changing risks

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Cashflow

• Organisations fail through lack of cash, not lack of operating surplus / reserves

• Also need to be aware of the unrestricted / restricted cash split

• What information are your trustees receiving on cashflow?–How regularly?

–Period covered?

–Are the key variables and cashflow risks clear?

–Cashflow management processes?

• All organisations need a closer control over cash in difficult times; ensure these basic processes are in place and under control in your charity

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Going concern issues

• Auditors looking very carefully at the robustness of going concern assumptions, operational plans and supporting evidence (at audit planning and completion)

• Under auditing standards – duty lies first with the trustees to satisfy themselves over the going concern basis

• One year from the date of signing the accounts, not the year end

• Cashflow is key – minimum of 12 months from signing split across restricted and unrestricted funds

• Potential for trustees to be in breach of trust where using restricted funds for unrestricted purposes. Review your net asset funds note

• Have you seen all the evidence you need? Letter of Representation – are your senior management team happy for you to sign it?

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Scenario planning

• Questions for trustees:

–What scenario planning has taken place in your organisation?

–Who was involved?

–How often is it renewed?

–Balance of external / internal information used?

–Conservative / wild and whacky scenarios?

–Is it clear what action needs to be taken and when in each case?

–How will you know which scenario is panning out and therefore when actions need to be triggered?

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Internal controls – fraud risk factors

Risk of fraud is heightened in times of economic downturn:

• Controls over company credit cards

• Expenses policy – self certification at the top?

• Access to internet banking and controls over payments (including payroll)

• Duplicate payments & dummy invoices

• Fraudulent changes to supplier details (and collusion)

• Controls over access to systems by leavers (watch your security over data)

Many frauds are not complicated; they are perpetrated at a basic transactional level and can be guarded against by good controls and by all staff being alert for the signs of a potential fraud

• And the typical fraudster is?

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Fraud risk

• Questions for trustees:

–Do you have a clear strategy in place to reduce fraud within your organisation?

–Do you measure and monitor the risk and the cost of fraud in some way?

–Is there a clear counter fraud culture in place within the organisation?

–Is there a clear whistle blowing policy in place?

–Are firm, rapid actions taken if fraud is discovered?

–Is detection and prevention of fraud built into controls, systems and processes?

–Do fraud issues get discussed at board level?

–Do you periodically assess the effectiveness of your approach to fraud?

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Reserves policy

• Why do charities hold reserves?

–to fund working capital

–to fund unexpected expenditure, for example when projects overrun or unplanned events occur

–to fund shortfalls in income, when income does not reach expected levels

•Current reserves level – what are your free reserves?

–Exclude those that cannot be turned into cash quickly e.g. fixed assets

–Exclude restricted funds

•What reserves does your charity need i.e. what are your charity’s rainy days?

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Reserves policy (continued)

Questions for trustees:

•When did you last revisit your reserves policy?

•Does it remain appropriate to your charity’s changing needs?

•Is it clear how you plan to manage any gap between current reserves levels and reserves targets?

•How often do reserves levels get discussed at trustee meetings?

•Are the links to the risk register and your strategic direction clear and well understood?

•Have a good look at your restricted funds – can you use them better whilst complying with their terms and conditions?

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Signs of operational stretch

• Change management + keeping the show on the road = potential operational stretch

• Your senior management team are key; they need to be supported and challenged – balance is important

• How can you address operational overstretch?– Just do the important stuff

– Postpone less important things

– Do things differently

– Get more resources

– Use trustees & volunteer skills and commitment

• Watch out for the warning signs

• Discussions with auditors

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Changing Risks

• Questions for trustees:

–When did you last see your risk register?

–Does it reflect the key risks the organisation now faces?

–Is it clear what the key risks are, how they are being managed and how they are being monitored?

–How often do trustees receive a report on organisational risk?

–What actions are taken when a heightened risk is identified?

–Who is scanning the horizon – is anyone looking across sectors?

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PKF/CFG 2012 Annual Risk Survey

• Assessments of value for money are changing• Sector improvements are being held back by resource

limitations• There is opportunity for better performance management

processes• Significant change is planned in premises holdings• Improvements in procurement are being sought• Investment return remain a major concern• Fraud detection is increasing but could be improved• Concerns over funding are still being identified as charities

biggest risk

Risks and the current Economic Environment

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• Potential Conflicts of Interest

• Regulatory requirements

• Cashflow forecasts – split between funds

• Robustness of budgets, forward strategic plans

• Signs of Management stretch

• Use of restricted funds- are you using them effectively?

• Bribery Act – Compliance Toolkit updated

• Local Laws and Regulations

• Foreign Exchange Rates

• Stock and property values

Keep on your radar

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• Strength of the internal control environment and risk management procedures. When things change the routine can be overlooked and internal controls weaken

• Fraud risk – proven fact that the likelihood of a fraud increases during a recession (internally and externally)

• Ensure your tax planning is as effective as possible – new changes all the time – especially on the VAT front. Increase in PAYE Inspections

• Charity Commission website, sector umbrella groups and charity specific publications

• Remember there are lots of opportunities out there (even if it is not always easy to find)

Keep on your radar

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Keep on your radar

• Changing operational and regulatory environment – are opportunities as well as challenges (VAT, Real Time Information, auto - enrolment are good examples)

• When things change – the routine can be overlooked and internal controls can weaken

• Are our gift aid claims up to date? – easy money sitting there for you to reclaim

• What are others doing across sector(s) – can this benefit us?

• Remember there are a lot of opportunities out there for your organisation (even if not always easy to find)

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To sum up – some key messages

• Ask the right questions – even if they are difficult ones

• Trustees may need to challenge the sacred cows and previously accepted wisdoms from management

• Take advice if you need it – use someone as a sounding board

• Be aware of the risk of management stretch – remember somewhere along the line it will always impact on the finance team

• Identify the “must do’s” and get those right

• Keep asking – is there a way we can use the assets and resources currently employed in a better way?

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A final thought…

“If you do what you’ve always done,

you’ll always get what you’ve always got.”

Anthony Robbins

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Breakfast seminar

It's never too early to get technical

The London office will be holding a breakfast seminar on Tuesday 29th January 2013. The seminar will provide a legal and technical update on topics including UK GAAP and speakers will include myself, Sarah Campbell, Rob Frost and guest speaker Anne-Marie Piper, Head of Charities at Farrer & Co.

Further information can be found on the PKF website under events.

If you think this seminar will be of benefit to any of your trustees or management or if you would like to come along, please inform Rena Jansari (020 7065 0419).

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Questions?

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Contact us

• Ian Mathieson ian.mathieson@uk.pkf.com

020 7065 0399

• Julia Poulter julia.poulter@uk.pkf.com

020 7065 0694

PKF (UK) LLPFarringdon Place, 20 Farringdon Road, London EC1M 3AP