How the Charity Commissions inquiries process works:
There are many different ways in which a charity may enter the spotlight of the Charity Commission, either through general inquiry by the public or an individual connected to the charity, through requests to change governing documents, adverse media attention and let us not forget the duties of a charity with regards to serious incident reporting.
As a result, the commission opens many inquiries each year however it doesn’t always publish statements about all its regulatory cases if they are not of sufficient interest to the public or if the trustees are not aware that an inquiry is being opened.
The commission may decide that releasing a statement of inquiry would be beneficial if:
- There is significant public interest in the issues involved and the outcome, for example:
- There is media coverage of a charity or the commission’s engagement with a charity on a particular issue.
- The commission wants to respond quickly to concerns over matters raised.
- It will increase public trust and confidence in charities through lessons to be learnt for others operating in the sector or for the donating public
An open inquiry will be linked to the charity’s entry on the public register though there are instances when the Charity Commission would not publish an open inquiry or the outcome of the inquiry including where it would:
- Interfere with or prejudice legal proceedings, due process or the effective outcome of the commission’s investigation or the operations or investigations of other agencies
- Be acutely detrimental to a particular individual or group of individuals, for example, a risk to someone’s personal safety
- Unduly impact commercial sensitivities or give rise to national security issues
- Cause severe prejudice to the charity and/or its beneficiaries
- Prejudice or contravene the commission’s legal duties.
In certain circumstances, the commission may find it more appropriate to issue a sector alert. Most recent sector alerts, published on the Charity Commission website, relate to the numerous types of fraud risk a charity may face and the articles published provide some useful insight into how a charity can best protect itself from fraud attacks. The most recent article dated May 2019 discusses cyber fraud, an ever-increasing issue according to many of our clients. There are useful links to the National Cyber Security Centre (NCSC) toolkits for both small and large charities to help them protect against cyber crimes. The article also explains how charities can become accredited under the government Cyber Essentials Scheme (scheme launched in 2014 and backed by industry including the Federation of Small Businesses, the CBI and a number of insurance bodies enabling organisations to gain one of two Cyber Essential badges).
Common themes and messages to Trustees:
A brief review of the Charity Commission website as of May 2019 shows the outcomes of 11 inquiry reports this year and it is clear that certain themes are arising:
1.Governance, management and administration of a charity
Trustees are representatives of the charity they govern and the charitable funds which they are responsible for and so they must be aware of and act in accordance with their legal duties at all times. The conduct of trustees can be a key driver of public trust and confidence in the charity sector and when the conduct of trustees falls below the standards expected there can be damage to the reputation of individual trustees, the charity and possibly the wider charity sector.
The trustees of a charity are collectively responsible for its proper management. They should act together, in accordance with the requirements of their governing document and the general law, and they must always bear in mind their over-riding duty to take decisions that are in the best interests of the charity.
2. Financial controls, management and application of funds donated to the charity
Trustees have legal responsibilities to keep accounting records, and to prepare an annual report and accounts with the appropriate level of external scrutiny. Trustees must also safeguard their charity’s assets and take steps to ensure the charity is protected against financial abuse. Accounting records must be kept for at least six years (or a minimum of three years if a company charity).
Trustees have a number of legal duties that must be met in relation to accounting and financial reporting. These include:
- Keeping ‘sufficient’ accounting records to explain all transactions and show the charity’s financial position.
- Preparing an annual report and statutory accounts meeting legal requirements.
- Considering the need for a reserves policy, managing the level of reserves held and the disclosure of any reserves policy in the Trustees’ Annual Report.
- Ensuring that the Trustees’ Annual Report, accounts and annual return are filed on time with the Charity Commission where filing is required by law and, if the charity is a company, also filed with Companies House.
- Safeguarding the assets of the charity and ensuring the proper application of resources.
3. Duties and responsibilities of Trustees
Making decisions is one of the most important parts of the trustees’ role and trustees can be confident about decision making if they understand their roles and responsibilities, know how to make decisions effectively and are ready to be accountable to people with an interest in their charity.
There are 7 principles that the courts have developed for reviewing decisions made by trustees.
- Act within their powers
- Act in good faith and only in the interests of the charity
- Make sure they are sufficiently informed
- Take account of all relevant factors
- Ignore any irrelevant factors
- Manage conflicts of interest
- Make decisions that are within the range of decisions that a reasonable trustee body could make.
Trustees are custodians of their charities. They are publicly accountable, and have a responsibility and duty of care to their charity which will include taking the necessary steps to safeguard their charity and its beneficiaries from harm of all kinds.
It is essential that charities engaged with children or vulnerable people:
- Have adequate safeguarding policies and procedures which reflect both the law and best practice in this area
- Ensure that trustees know what their responsibilities are and
- Ensure that these policies are fully implemented and followed at all times.
Trustees must therefore regularly review the steps that are taken to provide them with assurance on the fitness for purpose of their policies and the extent of compliance in the charity’s practice with those policies. Any failure by trustees to safeguard children or vulnerable adults and to manage risks to them adequately would be of serious regulatory concern to the Commission and it may consider this to be misconduct or mismanagement, or both, in the administration of the charity.
5. Managing conflicts of interest
It is vital that trustees avoid becoming involved in situations in which their personal interests may be seen to conflict with their duties as trustees.
Trustees must actively manage any conflicts of interest and there must be a clear record kept of any potential related party transactions. Individual Trustees should step back from or avoid any situation where a conflict exists or is likely to arise if it is clear the conflict cannot be adequately managed. As always, records of key decisions made, and the reasons for those decisions should be clearly documented in case of future scrutiny or inquiry.
6. Working internationally – risk management and monitoring
When working internationally, charities often operate through local partners rather than establishing their own delivery infrastructure in their country or region of operation. Working through or with local partners can be an effective way of delivering significant benefits direct to a local community.
It does not, however, shift or alleviate responsibility for ensuring the proper application of the charity’s funds by the local partner. That responsibility always remains with the charity trustees, forming part of their duties and responsibilities under charity law. When choosing local partners to work with, trustees must conduct adequate due diligence checks to ensure that:
- The activities they intend to carry out through their local partners are in furtherance of their charity’s purposes
- Their partners are and continue to be appropriate for the charity to work with
- The trustees have taken reasonable steps to monitor the use of funds to make sure that their partners can and will apply their funds for proper charitable purposes and the funds reach their partners and end beneficiaries.
To do this effectively, Trustees should put agreements between their charity and its partner organisations in writing, and specify the funds being made available, the timeframe for delivery of the project and measures of success. The agreement should set out clear requirements for reporting to the charity on progress and financial expenditure and the trustees should ensure an appropriate system of monitoring is in place. Admittedly, for a variety of reasons monitoring may not be easy and may present practical challenges. This is particularly so in certain parts of the world where access to the areas in which the charitable work is being carried out may be restricted. Failure to carry out proper due diligence and monitoring, particularly where the risks are higher, may mean a trustee does not discharge their legal duties and this failure may be regarded by the Commission as evidence of misconduct or mismanagement.
If you are not already aware of these publications we strongly suggest that you undertake further reading and please don’t hesitate to contact us if we can assist in your understanding of these matters:
Internal Financial Controls for Charities (CC8) There is also a self-check-list for trustees which has been produced to enable trustees to evaluate their charity’s performance against the legal requirements and good practice recommendations set out in the guidance.
This article was written by Charity Specialist Suzanne Goldsmith. If you have any questions regarding this article you can contact Suzanne using the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.