In the Charity Commission’s 2018/19 annual report, its chair, Tina Stowell, acknowledges the benefits a thriving charity sector brings to our society. A new statement of strategic intent highlights the importance of involving the public in the sector as much as possible and understanding its requirements. In a significant change of strategic direction, the Commission has demoted its role in representing charity interests to the public in favour of holding charities more to account against public expectations.

Given the recent media coverage of certain charities and their actions, this is perhaps not surprising, however unfortunate it might be. The Commission has always managed to balance carefully a role as regulator against a role as supporter and guide to voluntary groups, and the quality of its guidance is world class. When things go wrong, as we must all acknowledge they have, it is perhaps not surprising that a regulator seeks to concentrate more on reducing the risk of any recurrence than on enabling new, enthusiastic organisations.

Communication lies at the heart of building trust in our charitable sector and, in particular, trustees need to be accountable for stewardship of their assets and their activity. The impact and value of their work must be explained clearly, not just to donors and potential donors but also to any stakeholder interested in the brand and reputation of charity generally.

The content of a charity’s annual report is governed by the SORP so, while in 2019 a review of the Commission’s strategy was undertaken, it is unsurprising that a review of the way that the SORP is developed was also taking place.

A little history

In the 1960s, the accountancy profession began to codify the way that financial accounts for the corporate sector were assembled and standardise the way that alternative accounting policies should be applied to maximise consistency in accounts production. The number of accounting standards grew and, because accountancy and finance have an international language of their own, international accounting standards began to be developed and applied. To this day, the accounting profession is probably the only one with a comprehensive set of global standards. In the UK, the development of these standards is overseen by the Financial Reporting Council (FRC).

Many charities were also companies limited by guarantee, so these rules applied to a major part of the charity sector as well and, even where charities were not incorporated, the accounting standards began to be applied generally across the broader business sector anyway.

It became increasingly apparent, though, that a set of rules developed to keep directors consistently reporting profits was not always appropriate for trustees without a profit motive. Profit or surplus is not a critical measure in the charitable sector. This was also true in a number of other sectors and so the idea came about to develop a statement of recommended practice to guide preparers in particular sectors how to apply general accounting rules in their sector and, in 1995 the Charity SORP was issued.

So we have our own set of charity accounting rules, based on those applicable to trading companies. Changes to these rules are initiated by the SORP committee under the auspices of the Commission.

SORP development

The recent review of the process of development of the SORP notes the vast improvement in charity reporting that has resulted including common disclosures, consistent accounting policies, and better decision-making.

However, there have been some tensions in the development of the SORP. The charity sector varies more than any other, from large, fundraising, staff-employing service deliverers at one end of the spectrum, to small, enthusiastic, volunteer-driven, grant-giving funders at the other. Can one set of rules apply to both?

Complexity has become an issue – if charities feel the need to produce a second, simpler, document for communicating activity, perhaps the SORP committee is getting too detailed in the level of mandatory disclosures rather than leaving these decisions to the professional judgement of trustees and accountants to manage the communication. Should a top-down approach should be discarded in favour of a bottom-up one?

The process review was carried out by asking a number of stakeholders for their opinions. Conclusions were reached with very little evidence adduced, so the reader cannot help wonder if those who shouted loudest were heard over those with weaker voices. This is unfortunate, as potentially sensible ideas from individuals do not seem to have been explored in terms of their practicality.

The result of the review is that the current SORP committee is deemed not fit for purpose and a new committee is being recruited with a mandate to simplify and clarify charity accounts. Trustees are asked to get more training in financial matters. The committee must be based more broadly and consult more widely.

Here, I must declare a conflict of interest as a member of the disbanded SORP committee but, having that inside knowledge of the workings of the old committee, I am not at all sure that these changes will produce a higher-quality set of regulations or greater input from the sector. I admit to being dissatisfied with the output of the committee, but my sense is that this had more to do with the areas of focus and chairmanship than the talents of the committee members, who generally presented their views cogently. There is little doubt that there was a majority of finance professionals on that committee and a dearth of untrained users, but accounting is technical by nature so perhaps that was understandable, and there was little lack of criticism of the existing SORP as a result. More users and fewer preparers is a good principle, however.

Accounting standards are complex and this has an impact on the nature and breadth of consultation responses, which is a problem for all standard setters. The SORP process is no worse than that of any other standard-setters and no others have managed to resolve the issue of maximising response levels. For example, the issue of small charity simplifications has been discussed at almost every meeting in the last two years but with little action taken as a result.

Where now?

So the current process is flawed and the outcome complex and not readily understood. Changing the committee in the way recommended in the review is unlikely in my view to result in any fundamental correction of the failings identified. The Commission will be able to point to a public consultation exercise and some resulting changes, but it is easy to be cynical and think that, without a review of the fundamentals, an opportunity has been missed.

And there is a fundamental issue linked to the way that standard setting has developed. Missing from the history set out above is the fact that, in more recent years, international accounting standards for the public sector have been developed and accepted. These did not exist when the profession and the regulators were originally trying to address charity accounting, but are far more relevant to the user needs than standards developed for the corporate sector.

These public sector standards are focused on stewardship of assets, output values and impact accounting, precisely the areas with which charity reporting should be concerned. The quality of charity accounting using public sector accounting principles would be vastly improved. Instead of being overseen by the FRC, which has a mandate to keep the SORP as consistent as possible with a set of trading accounts, the Commission and SORP committee would be free to design a set of reports giving clear, accurate information about how the trustees have added benefit to society, not how the surplus for the year has been calculated.

Disclosure of a charity’s operating model and how they raise their money would be included, together with the trustees’ decision-making process for how those funds are then used, and the purpose to which they have been put. This would enable the reader to understand the risks to sustainability and why reserves are needed, as well as a fundamental message about the impact on society that the charity has made.

It is a matter of regret that the UK, having led the world in a standard for charity accounting, now risks getting left behind as the International Public Sector Accounting Standards Board moves towards developing charity accounting internationally on a more sound base of public sector accounting while we cling to a private sector model simply because it already exists and we know and understand it.

Eventually, the rest of the world’s reporting could develop and improve to the point where it is of a higher quality and more useful than ours and our charities will discard our local standards in favour of international standards. This would be a great shame and an indictment of our inability to think outside the box, and a realisation that this review is a missed opportunity to radically rethink and improve the accountability of trustees.

The Commission wants to address the increased public scepticism endemic in society today, and the detrimental impact of this upon the charity sector. It wants to ensure that charities live up to their purpose and the high expectation of the public, by ensuring that charities are properly accountable. If it is serious about this strand of its new strategy, it needs to move away from a discredited accounting framework and embrace the movements driven by the global profession. Otherwise it risks being left behind.

Mark Spofforth is a partner at Kreston Reeves

Charity Finance wishes to thank Kreston Reeves for its support with this article