The Public Administration and Constitutional Affairs Committee (PACAC) report on the failure of Kids Company has been released. The report has a number of lessons that the charity sector needs to learn, this blog post outlines some of the main points that we should take away from a finance perspective.
1. We need to explain better what an audit tells you about a charity
In the wake of the collapse of Kids Company, officials and trustees from the charity and government pointed to the 19 years of clear audits as a sign of financial strength and reliability. At the time, this raised a number of eyebrows. And the report has rightly highlighted this. As the report says:
“This…provides a reminder to all who use charity accounts that a set of audited accounts do not provide assurance that charitable funds are being used wisely or that a charity is well run.”
An audit does not tell you whether a charity is financially sustainable. What it does tell you is that the information provided about its financial position is true and fair – i.e. its accounts are accurate about its actual financial position and that assumptions they include are reasonable.
Donors, funders, regulators and the government need to understand this and interrogate accounts and make their own judgements about the financial sustainability of the organisation – rather than relying on ‘audit’ as a clean bill of health.
Another way that we can improve decision making about charities is to improve the standard of annual reports. Annual reports should explain the strategy of the charity, both financially and in terms of how they will achieve their charitable objects. It should help donors, funders, regulators and the public to understand why a charity has taken the approach it has and what the risks/opportunities facing an organisation. Some charities do a great job of using their annual reports; but others treat them as a pro forma. We need to shake the latter out of this approach.
2. Robust internal financial controls must be regularly reviewed
All charities have a duty to ensure that their resources are protected in order to fulfil their aims. One of the main ways to achieve this is through robust internal financial controls. As the PACAC report demonstrates, a lack of internal financial controls creates risks for an organisation and you cannot rely on auditors to ensure that internal controls are working.
The whole organisation has to own the concept of good financial management. As the Charity Commission’s guidance on Internal financial controls for charities (CC8) says:
“Making controls work should not be seen as just the responsibility of one or two trustees or senior staff members, or as applying to some but not others.”
All trustees, staff and volunteers should be keeping a watchful eye on how resources are used within the charity and reporting any irregularities. The fact that senior individuals within a charity choose not to work within these controls is not a good enough reason for letting things slide.
At a minimum, trustees should be regularly reviewing (once a year is the advice) their internal financial controls to make sure that they are effective and ensure effective separation of duties so that no individual has unchecked control over the charity’s finances.
3. Charity Commission needs more funding to do its job effectively
PACAC’s report says several times that it is surprised that auditors and others didn’t raise concerns with the Charity Commission about the operation of Kids Company. But it seems clear from the report that avenues for reporting concerns are not known enough. This is an issue that was also highlighted in CFG’s report on public perceptions of charity regulation and its future funding.
Effective regulation needs publicity not only to give the public confidence that charities are well regulated but also so that individuals know where to go in case of wrongdoing.
Regulation cannot be done on a shoestring budget. The Charity Commission has already seen cuts over funding of around 50% since 2010. The government needs to resolve this issue as soon as possible. Although the budget of the Commission was frozen at just over £20m, this level is not sustainable. Both this PACAC report and last week’s report on fundraising raised the issue of funding of the Commission.
We do not believe that charging charities is an effective solution to this. The most straightforward way to resolve this problem would be for the government to restore the Commission’s budget to its previous level so that it has the resources necessary to do its job. The Chancellor has an opportunity to do this in just over a month’s time, CFG will keep banging the drum for this necessary investment.
4. Finance has to be at the heart of organisational decision making
The story of Kids Company is a salutary lesson for the whole sector about the need to put finance at the heart of an organisation’s decision making. In too many organisations, financial strategy is relegated to second place whilst there is an admirable focus on the cause and beneficiaries. But the truth is that both need to be put on an equal footing.
Without a robust financial strategy, you can’t support your beneficiaries. Without thinking about the needs of your beneficiaries, you can’t develop an effective financial strategy.
Too often, CEOs and trustees leave finance to other people and see it more as a box-ticking exercise. Unsurprisingly, at CFG, we think that is the wrong approach.
CFG regularly hears from members about how putting finance at the heart of an organisation can make charities more effective and lead to better decisions about how to meet the needs of beneficiaries. This is even more important during a period of significant financial volatility for the charity sector. If you want more help and support, check out CFG’s events over the coming year.