When you give to a charity, you want to know that your money is being spent wisely — and helping the people they say it will help. That’s why all UK charities are held to a set of legal standards, including how they report their finances.
But in my 25 years of working with the voluntary sector, I saw how the rules around these obligations were penalising smaller charities and leading to huge admin costs.
Ironically, the regulations designed to make sure charities’ money was being spent properly were in many cases leading to those same charities spending unnecessarily large amounts of money on red tape. And that was money they could be using to advance their charitable work.
As a result of my research, medium-sized charities with an income of between £500,000 and £1 million — often key local organisations providing vital services — now spend far less time and money on financial reporting, while maintaining the transparency and accountability needed to show they are being run properly.
And research I have led with colleagues around the world is leading towards a global set of standards for non-profit organisations.
To audit or not to audit
Before 2015, charities and non-profit organisations in the UK would go down one of two routes for publishing their accounts.
Those with incomes of under £500,000 could undergo an independent examination of their accounts. Charities with an income of more than £500,000 were subject to a full professional audit.
There are many similarities between an independent examination and a full audit. Both involve a thorough scrutiny of the charity’s finances, and both are subject to legislation.
But a full audit is much more expensive for the charity. It can only be carried out by a firm of registered auditors — not many accountants have that status — and it’s a much lengthier process.
For example, while an independent examiner will check the books agree with the final accounts, and make sure grants have been spent on their proper purposes, an auditor also has to spend a lot of time reviewing policies, estimates and valuations.
In business, a full audit is only required for companies with a turnover bigger than £10 million, so it was unfair that small and medium-sized charitable organisations were forced to comply with such a stringent and costly process.
I conducted a study of financial reporting in the charity sector which showed that an independent examination was effective, robust, and capable of being used more widely.
As a result of my study, and my subsequent appearance before a parliamentary committee, in 2015 the law was changed. The income level at which a full audit was required for charities in England and Wales was raised from £500,000 to £1 million.
Between 2015 and 2020, this change alone saved charities in England and Wales £40 million. All of that money went directly to good causes rather than accountants.
A wider change to the standards regime
In recognition of my many years of research in this area, in 2018 I was appointed chair of a review into the governance of rules on charity accounting, known as the Charities SORP, in the UK and Ireland.
We produced a report which called for an overhaul of how the Charities SORP is developed, placing a much greater emphasis on helping smaller charities.
We called for the rules to be clearer, with less use of jargon and an easier way for small charities to apply. We introduced a stronger focus on the public interest. And we suggested much wider representation on the panels from people who actually use charity accounts, such as donors and funders.
Since 2020 I have been contributing to some of those panels, and full implementation of the next SORP is due in 2024.