The impact of Kids’ Company continues to reverberate in the charity sector. Companies House is now taking action against the former directors of Kids’ Company to ban them from serving as company directors. It is also noticeable that the Charity Commission are taking a much more proactive and interventionist stance towards charities where they believe that trustees are taking insufficient care to retain adequate reserves for charities. They are also expecting auditors and independent examiners to take a more active and responsible role in helping them regulate the sector.
Firstly, the Commission has carried out compliance visits to charities that had indications that they may be at risk of “financial distress”. Charities were selected because where for instance the charity had an “emphasis of matter” regarding going concern in their audit reports, there appeared to be insufficient reserves or there were significant deficits on pension funds. The first report arising from this exercise has been issued in respect of the National Hereditary Breast Cancer Helpline, and a number of regulatory concerns have been identified, mainly in connection with related party transactions. The Charity Commission have for the first time issued the charity with an “official warning”.
Although only a few charities have been selected for review this is indicative of a far more robust policing of the sector when taken in conjunction with their campaign to ensure charities file accounts on time.
In a separate development, the Charity Commission have indicated that they are now expecting auditors and independent examiners to make a formal report to the Charity Commission far more frequently and in particular when a qualification or emphasis of matter is included in the audit or independent examiner’s report. This is particularly the case if there are going concern issues or issues with insufficient reserves.
One of the main criticisms of the auditors in the “Kids’ Company” case was that although they had correctly identified there was an issue and referred to it in their audit report, some felt the wording was insufficiently robust and the auditors did not follow this up by contacting the Charity Commission to discuss their concerns. The new requirements are intended to avoid such issues in future.
What does this all mean for charities?
Trustees will be expected to take a far more responsible view to ensure that the charity has sufficient reserves to maintain activities. Charities should also expect a more interventionist line from the Charity Commission, particularly where the auditor or independent examiner has commented on the going concern status of the charity. Auditors and Independent Examiners will need to take a more thorough review of the going concern status of the charities and where necessary raise this issue with the Charity Commission.
There are of course no similar reporting requirement for other not for profit entities, but the lessons of ensuring that there are adequate reserves apply equally across the sector.