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  1. ART CHARITY TRAINING SEMINAR Introduction Phillip Callow – Specialist Charities Partner - Mazars 9 May 2005

  2. Charities - PotentialIssues Role of the Trustee / Corporate Governance Trustee conflicts of interest Effective trustee meetings Risk management Money laundering Soft vs. Hard return to beneficiaries Changes in regulatory environment Issues potentially facing charities SORP reporting Reserves policy Maximising recoverable VAT Incorporation considerations Management of property Partnering with business Charitable reliefs © Mazars 2003

  3. Agenda • Introduction & welcome • Key principles - accounting • Corporate Governance – so you want to be a charity? • Break • Draft Charities Bill Update • Accounting for Public Funds: The New Issue • SORP 2005 update • Questions • Additional slides - auditing service level agreements • Additional slides – risk management and assessment

  4. ART CHARITY TRAINING SEMNAR Key Principles – Accounting Ian Rodd – Charity Manager - Mazars

  5. Key Principles We are looking at: • Why are charity accounts different: • Fund Accounting • Income Recognition • Cut off • Expenditure • Balance Sheet

  6. Key Principles How do Charities differ from Businesses? Business - exists to make a profit for shareholders Business - operated by spending money to make (more) money Businesses accountable to shareholders, regulators…. Charity - exists to fulfil charitable purposes (not for profit) Charity - receives money in order to spend it on charitable purposes Charities accountable to donors, regulators…..

  7. Fund Accounting Different types of fund: Unrestricted: Undesignated / Designated Restricted: Income / Capital Capital - Permanent Endowment Expendable Endowment Designation - by trustees (for future plans, capital items) Restriction - by donors / terms of appeal. Can only be used for that purpose. Each restricted fund is a trust - and needs to be accounted for separately. (So charity accounts can be so complicated…)

  8. Fund Accounting Restricted Funds: Is a restriction permanent? Restricted fund / contract income Interest earned on restricted funds (Interest earned on endowments)

  9. Income Recognition (1) Income Recognition A resource is available when all of the following conditions are met: Entitlement Certainty Measurement Test any transaction against this criteria

  10. Income Recognition (2) Entitlement – is there any condition to be met before trustees can use a receipt ? • e.g. match funding, delivery of a service, time period to elapse? • case defer until entitlement clear • Certainty - is there any question over the likelihood of receipt? • bad debt, unclear promise? • Measurement - can a value be placed on the item? • Does an asset need to be sold first? • Note - would all these apply to a commercial transaction?

  11. Cut off Issues In what period does a resource become available to the trustees? - Tests of entitlement, certainty, measurement - Is there a condition that needs to be met first? - Does a contract have to be fulfilled? - What about donations for capital items? - Does it matter if it has been spent?

  12. Examples The Wells for Africa Foundation: What are the issues in accounting for the following items? - £20,000 to dig wells in Sudan - £20,000 to dig 10 wells in Sudan - £20,000 to dig wells in Africa - £20,000 to fund a well development officer in 2005/06 in Africa - £100,000 to buy a JCB to dig wells in Africa (expected useful life 5 years) What happens if it only costs £15,000 to dig 10 wells in Sudan? (5 Marks)

  13. Expended Resources Issues - Cost allocations (shared costs) - Descriptions of resources expended - Timing of liability recognition (grants) - But see SORP 2005….

  14. The Balance Sheet Gives a snapshot of how year end resources are held by type of assets AND analysis of assets held by fund (usually in notes) Some unique valuation issues: - Inalienable assets - Distinction between assets held for Primary Purpose and Investment

  15. ART Charity Training SeminarCorporate Governance- So You WANT To Be A Charity? Phillip Callow

  16. Corporate Governance • Trustee responsibilities • Corporate Governance

  17. Controls and budgets Strategy Policies Competent staff Use of assets Trustee recruitment Advice Trustee responsibilities Committees Conflicts of interest Performance reviews Volunteer Duty of care Charity effectiveness Fiduciary Best interests © Mazars 2003

  18. Job description Word of mouth Other charities Diversity Governing document Trustee finding service Preparation Method Advertising Skills audit Trustee recruitment and induction Evaluation Checks Hand over Induction Financial training Meeting Documentation Secure the property Conflicts of interest

  19. Topics What is Corporate Governance? Charities and Governance Recent governance developments Next steps and conclusions

  20. Legal and regulatory bodies Ethical behaviour The systems and structures by which organisations are directed and controlled Honesty and transparency Members andstakeholders Accountability Public opinion Openness What is Corporate Governance?

  21. The Triple Bottom Line Reporting andCorporate Social Responsibility (CSR) • Economic and financial stability. • Social responsibility • Environmental responsibility with ethical investments and products/services Emphasis on stakeholder relationships and managing these relationships

  22. Topics What is Corporate Governance? Charities and Governance Recent governance developments Next steps and conclusions

  23. Continuous history of scandals… • Accountability of receipts • Trustees and workers • Connected parties • Other irregularities All signs of poor overall governance !

  24. Characteristics of Trustees and Trustee Boards • Composed of non-executive directors (trustees), headed by a non-executive chair • Chief executive usually not a member of the trustee board although may attend as a non-voting member; trustees do not attend senior management meetings • Trustees are generally not paid • Trustees are not formally recruited but personally invited to serve • Little performance evaluation or ongoing training and development • Skills deficits on many boards • ‘Inspection’ committees missing e.g. Audit Committee • Insufficient focus on stakeholder risks

  25. Charity Commission - Guidance on many topics • The Hallmarks of a Well-run Charity • Responsibilities of Charity Trustees • Payments to Trustees • Accounting and Reporting Requirements • Internal Financial Controls • Charities and Fund-raising • Charities and Trading • !

  26. SORP 2005 – Governance disclosures in the Trustees Annual Report • Names of all trustees, method of appointment or election of trustees • Name of any others entitled to appoint the trustees • Explanation of the objects of the charity • Description of the organisational structure and how decisions are made • Statement on relationships with related parties • Review of the activities of the charity • Statement on risk management • Statement of the charity’s policy on reserves and investments

  27. The Charities SORP states that charities must include in their Trustees annual report: “a statement confirming that the major risks to which the charity is exposed, as identified by the trustees, have been reviewed and that systems have been established to mitigate those risks”. Paragraph 31 (g) Risk management

  28. Topics What is Corporate Governance? Charities and Governance Recent governance developments Next steps and conclusions

  29. ‘Higgs’ key features ‘Smith’ key features • Board balance and independence • Appointments to the board • Information and professional development • Performance evaluation • Role of non-executive • Strategy • Performance • Risk • People • Role of Audit Committee • Financial reporting • Internal controls and risk management systems • Whistle blowing • The internal audit process • The external audit process • Also: • Composition, resources & reporting Revised Combined Code The Code applies to listed companies for reporting years beginning on or after 01.11.2003. Its principles and provisions are a major source of best practice for organisations including charities.

  30. Corporate Governance Focus • Don’t lose sight of the spirit of governance - a simple ‘tick box’ approach to governance is not enough – it’s the ‘spirit’ which counts. • As Derek Higgs stated in his review:Corporate governance provides an architecture of accountability – the structures and processes to ensure companies are managed in the interests of their owners. But architecture in itself does not deliver good outcomes. • Sound corporate governance is associated with the quality of executive and non-executive directors – that is people. • Don’t forget stakeholders. Growth in corporate social responsibility reporting – this is ‘voluntary’ governance.

  31. Corporate Governance Focus • Rethinking Governance: The results of the ACEVO governance inquiry (December 2003) • Private Action, Public Benefit: A Review of Charities and the Wider Not-For-Profit Sector (September 2002)

  32. Topics What is Corporate Governance? Charities and Governance Recent governance developments Next steps and conclusions

  33. Improving Governance • Wider and more open recruitment of trustees • Consider paying for trustees who bring specialist skills to the board • Increase emphasis on training, development and performance appraisal • Consider different governance structures e.g. two tier board • Clarify what is expected of trustees e.g. service contracts • Develop inspection systems from audit committee to internal audit

  34. Conclusion • Build on existing governance guidelines • Incremental or radical change? • Draw on Combined Code especially Higgs themes • Sharpen the teeth of the Charity Commission …. FSA approach? • Match nature, size and complexity • Consider Public Interest and Stakeholders

  35. Beneficiaries Employees Members Local Communities Financiers Business partners Donors …The Court of Public Opinion The Media Competitors Regulators Politicians Government

  36. Stakeholders specific to the Charity sector • Trustees • Volunteers • Pressure Groups • Consumers/Clients/ • Funders • Benficiaries • …

  37. Topics What is Corporate Governance? Charities and Governance Recent governance developments Next steps and conclusions

  38. ART Charity Training SeminarDraft Charities Bill Update Phillip Callow

  39. The Charities Bill The story so far: • Strategy Unit Review 2002 (reforming the legal framework, building trust and confidence, ensuring independent, open and proportionate regulation) • Consultation – 2002 • Government’s Response – 2003 • First Draft Bill 2004(also SORP 2005, SIR, Guidance) • Parliamentary Scrutiny – 2004 • Bill introduced to House of Lords December 2004

  40. Charities Bill – Outcome of Scrutiny -1 • “Joint Committee” report published 30 September 2004 • Main conclusions: - Welcomes long overdue legal reforms - Keen to ensure smaller charities are not “over-burdened” - Like to see charities given greater freedom to trade - “desire to see charities – and charitable endeavour and income – grow, not diminish in our country”

  41. Charities Bill – Outcome of Scrutiny - 2 • 52 recommendations – include: - Clarify definition of religion - Commission to use its powers “fairly, proportionately and reasonably” - Fundraising and public collections – CC grant “certificates of fitness” • Trading within charities • Public Benefit

  42. Charities Bill – Outcome of Scrutiny - 3 • Trading (non primary purpose) • Advantages to allow charities to trade • But - should be an upper limit (higher than now) • Consultation needed on appropriate level

  43. Charities Bill – Outcome of Scrutiny - 4 • Public Benefit • Significant debate! • Principles set out in Home Office/Charity Commission joint concordat • Non-exclusive criteria, non binding guidance

  44. Home Office / Charity Commission Concordat • Current Law on public benefit retained (except presumption of public benefit removed for charities for the relief of poverty, advancement of religion and education) • Case by case determination • Fee charging: • Direct and indirect benefits to public or significant section of it taken into account • Fee charging does not necessarily preclude public benefit • An organisation that wholly excludespoor would not be for public benefit

  45. Charity Commission – Proposed application • Guidance posted: “Public benefit checks – how will we carry them out?” - Review applications from new charities - Research and report on fee charging charities - Check all existing charities - Provide guidance on any changes needed/right of appeal • Updated guidance RR8 “ The Public Character of Charities” – draft for comment to be published

  46. The Charities Bill – in conclusion • Next steps: - Queen’s Speech – 23 November - announced - Draft bill introduced to House of Lords 20 December 2004 - Bill still to be debated, passed and Assent given - Delayed by the General Election!

  47. ART CHARITY TRAINING SEMINARAccounting for Public Funds: The New Issue Phillip Callow

  48. Background We are looking at: A client we will call BME Which works for the social regeneration and social integration of black and minority ethnic communities Strategic programmes in the fields of: - community development - health - employment - other matters Policy and research into black and minority ethnic issues

  49. Income sources Donations,grants and contracts from private and public sector organisations including : - Home Office - Office of the Deputy Prime Minister - local authorities - health authorities - Association of London Government - London Development Agency - Millennium Commission - Comic Relief - Kings Fund - Baring Foundation

  50. Reasons for the investigation Principally: - interest of funders - concern over accountability for and use of funds Causes for concern included: - late filing of annual financial statements - lack of clear and timely responses to funders enquiries over use of and accounting for monies - poor substantiation of costs claimed - treatment of core costs - concern over possible double funding and misuse of grant monies