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Simpler accounting for smaller charities

Research carried out at Sheffield Hallam University has led to significant changes in the accounting requirements for charities in England and Wales. As a result of the research there are now simplified audit/examination requirements for smaller charities and a case has been made for further simplifications. These changes have led to savings for charities of at least £15 million in resources to spend on work with beneficiaries. Further benefits to the sector are expected to follow.

The research

The Charities Act 1993 created a statutory framework for financial reporting by charities in England and Wales. However, from the outset there was evidence of difficulties and high costs in its application, especially for small-to-medium charities.

The Charities Act 2006 made substantial changes to this – changes which were consolidated in the Charities Act 2011. The research discussed below contributed significantly to those changes. Further changes were accepted in principle by Government in 2012/13 and implemented in 2015.

The research, led by Professor Gareth Morgan with support from Neil Fletcher and others, has involved eight separate but linked studies of accounting and regulatory issues faced by charitable organisations in the UK (1999-2013). Firstly, they considered the role of charity independent examiners (IEs) used by smaller charities. These studies found that IEs were largely a very effective means of scrutiny for the accounts of small-to-medium charities. However charities structured as companies could not benefit from using IEs, but had to use a much less satisfactory (and generally more expensive) arrangement of appointing a ‘reporting accountant’.

Secondly, researchers also undertook a major study for the Charity Commission in 2010/11 regarding the new requirement to explain in annual reports how the charity had advanced its charitable purposes ‘for public benefit’. The study reviewed 1400 sets of charity reports and accounts and found relatively poor compliance in this and related areas. But it also found strong support for demonstrating charity accountability in terms of public benefit.

The impact

This research has led to acceptance by both the 2005-10 and 2010-15 Governments of several changes to the regulatory framework to facilitate more effective financial reporting by charities.

Specific changes to the regulatory framework of IEs have been triggered by this research. The regime for independent examination of charity accounts was extended from 2009 to almost all charities in England and Wales up to £500,000 income (previously the limit was £250,000 and charities structured as companies were excluded completely).

Over the period 2009-13 this has delivered possible savings of at least £15 million for charities in the income band £250,000 to £500,000. The changes have also led to statutory recognition of a new professional body in this field – the Association of Charity Independent Examiners (ACIE) – which is listed in the Charities Act 2011.

Lord Hodgson (an opposition peer at the time) drew directly on Morgan’s work to present arguments to Parliament which were eventually carried in the Companies Act 2006, which enabled amendments to the Charities Act 1993 to be made in 2008 (changes which are now in the Charities Act 2011). A completely new version of the Charity Commission’s Directions to IEs was issued in 2009 to reflect changes. The Parliamentary records make clear that it is most unlikely these changes would have taken effect without the use of this research to provide the arguments.

Further reforms to charity reporting and IE arising from this research have also been accepted as a result of Lord Hodgson’s appointment in 2011 as Independent Reviewer of the Charities Act 2006. His 2012 report to Parliament cited Sheffield Hallam University studies on issues of charity regulation on three occasions, regarding lack of compliance by companies with income over £500,000 and inadequate levels of Public Benefit Reporting (PBR) compliance.

The ability, or perhaps in some cases the willingness, of the sector to fulfil the reporting requirement is far from certain; compliance is very low. Research conducted by Sheffield Hallam University for the Charity Commission found that, among charities with income of over £500,000, only 25% fully met the requirement in their 2009/10 report.
Lord Hodgson, Independent Reviewer of the Charities Act 2006

He also recommended extending the IE regime to charities up to £1M income and removing an unhelpful assets threshold highlighted in the research. The Government was sympathetic in its response (and this change was subsequently implemented in March 2015).

The beneficiaries of these changes are all those who are served by the work of the charities concerned: resources previously spent in inappropriate audit work were released to support charitable work. Secondly there is a benefit to the public at large in that better understanding is available of the work of charities, given an improved reporting and scrutiny regime and better PBR, and more confidence that the tax concessions available to charities are effectively used.

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