Memorandum from Charity Administration
Resourcing and Accountability (DCH 317)
CARA's concerns are twofold. Neither of them
is addressed by the draft Bill in its present form:
1. The Charities Bill ought to require all
charities that receive significant voluntary funding from the
public to publish a simple and reliable annual financial summary
in specified form and understandable to the ordinary person without
the need for special accountancy training. For charities accounting
under the Charities SORP the derivation of such a separate summary
from its full accounts should be certified by the trustees.
2. The Bill should take the opportunity
to align charitable status more closely with public perceptions
of the essential difference between the "public sector"
and the "profit-seeking" sector. This would mean extending
the rebuttable presumption to all 11 of the proposed specific
charitable purposes instead of withdrawing it from the first three.
Charities are public sector bodies run by the
voluntary sector instead of by government itself. While the public
benefit aim is common to both, the essential difference is that
charities, even if delivering government services or otherwise
dependent on government funding, must be autonomous vis-a"-vis
the State—hence the title chosen by the Cabinet Office's
Strategy Unit for its September 2002 report: "Private Action—Public
Benefit". The public service ethos is to be contrasted with
the "survival urge" to make a living for oneself by
exploiting the natural, built or social environment for private
profit—as long as society's long-term interests are not
being sacrificed to short-term profiteering by ignoring any detrimental
effects of such exploitation. The difference between the two kinds
of motivation is obvious to the ordinary person and has lately
begun to inform the public pronouncements of the standard-setters
(UK/ASB, IASB and IFAC) responsible for the complexities of modern
financial reporting.
The charity sector, as the heart and soul of
the voluntary sector, has a larger penumbra of philanthropic,
benevolent and mutual or self-help organisations, the whole being
collectively known in some quarters as the "third" sector
of the national economy, to distinguish it from the "corporate"
(profit-seeking) sector and the government-run part of the public
sector.
Recently published think-tank research (nfp-synergy)
suggests that nearly 60% of the public now claim to have confidence
in "charity", against only 30% in the mid-nineties.
Only "the army" and "schools" rate higher,
it seems. Such a dramatic improvement in less than a decade is
not inexplicable: it coincides with the Charity Commission's marked
success in regulating financial reporting by the larger registered
charities since March 1996 through the Charities SORP and its
related regulations under the Charities Act 1993. This achievement,
however, did not consist of making regulated charity accounts
understandable to the ordinary person. The standards on which
they are based have been designed primarily to curb excesses in
the corporate sector, making them far too technical and convoluted
for a ready understanding by non-accountants. Public confidence
in charity is thus reliant on the reputation of the Charity Commission
and the auditing profession, not on the desired "transparency"
of charities' statutory annual accounts.
SUMMARY FINANCIAL
STATEMENTS
In addition to explaining what cash, investments,
other assets and liabilities belong to its various charitable
funds as at the financial year-end, any such summary for public
consumption should be required by law to show the gross cash receipts
of the year and to distinguish between payments made for grants/activities
in furtherance of the charity's declared Objects and payments
made for investment assets for the charity's own financial benefit.
This is broadly what non-company charities below the accruals
accounting threshold of £100,000 annual gross income have
to do under Part VI, Charities Act 1993 if they opt out of the
Charities SORP. The problem Charities not opting out of the SORP
currently have to account to the public in such sophisticated
terms under the rules of the commercially oriented accruals-accounting
standards that only specially trained accountants can understand
their statutory accounts. That cannot be good for public confidence
in the long run.
To bridge the gap in public understanding, and
at the same time to safeguard public confidence in the charity
sector, the larger charities should also be required to publish
cash-based financial summary statements as outlined above, certified
by the charity trustees to confirm to the public that they are
derived from and consistent with the information given in the
audited accounts. The largest charities already have to include
a Cashflow Statement as part of their audited accounts to comply
with FRS1, which for commercial reasons starts with the net cashflow
from "operating activities", whereas charities need
to show the gross cash inflow for their operating activities and,
separately, the cash spent on those activities, to enable the
public to understand how the charity is using such resources properly
for their intended purposes.
ALIGNING CHARITABLE
STATUS WITH
PUBLIC PERCEPTIONS
In doesn't seem very logical for the Bill to
recognise 11 specific kinds of purpose as having been generally
accepted in the public mind as "charitable" and then
to back-peddle by declaring that these only may be charitable—even
if adopted as the "exclusive" purposes of a trust, society
or association, whether incorporated as a separate legal personality
or unincorporated.
That seems to be the intended effect of the
proposed abolition of the existing rebuttable presumption of public
benefit for the first three of those specific purposes. Not only
must this change entail revisiting all the existing case law precedents
to establish their "analogy-value" for future charitable
status decisions, thus diverting substantial public and charitable
funds into the hands of the specialised lawyers who have to confront
each other with their arguments for and against, but it must surely
increase public uncertainty and produce a large number of appeals
to the proposed CAT over contested charitable status decisions
taken by the Charity Commission and—in numerous, if smaller,
cases—by the Inland Revenue.
Instead of undermining the existing legal ground
that public benefit can be taken for granted where a charity adopts
any of the Bill's first three specific purposes recognised as
charitable, would it not be more logical as a development of charity
law, and more in tune with public perceptions, to extend the legal
presumption of public benefit to all 11 of these listed purposes?
That way, wherever an organisation adopts one or more of these
11 purposes as its exclusively charitable purpose(s) it will continue
to be obvious to everybody that the price of charitable status
is the enforceable delivery of the public benefit for which that
particular purpose has been officially recognised.
And if those responsible for administering the
charity do fail to deliver on that presumption, its remaining
resources, having been provided to it for such charitable purposes,
will not be at risk of loss to the charity sector by diversion
to private benefit but can more readily be re-directed under charity
law to serve their original purpose—or the next best thing,
of course.
That, after all, is the way charity law seems
to have developed up to now. Why abandon what has worked for centuries
just because the number of recognisably charitable purposes has
multiplied? Why commit the Government, the public and the charity
sector to the huge legal costs that must be incurred if all the
specific charitable purposes have to be evaluated over and over
again for their public benefit content on a case by case basis
in developing a whole new set of case law precedents to replace
the existing ones?
July 2004
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