The Charity Commission has wide ranging powers to investigate charities and take regulatory action if it identifies a problem. It only publishes serious cases where there are learning points for other charities, but it has already published 38 regulatory reports in 2021 so far.
What prompts Charity Commission involvement with a charity?
In 2021, case reports show that the Commission became involved after:
- receiving complaints
- identifying issues in accounts
- receiving a serious incident report
- receiving a report on a ‘matter of material significance’ from the charity’s accountants
- being notified of a problem by another body such as the police or
- proactively requesting to visit a charity because of the risks inherent in the charity’s activities
In some cases, the Commission concluded there was no breach of duty or misconduct but gave support and advice to the trustees to improve things going forward. However, at the other end of the spectrum, interim managers were appointed, trustees were removed and disqualified from acting as trustees, and charities were closed down.
What were the most common issues in 2021?
There were five clear themes.
- Failure to manage conflicts of interest.
- Unauthorised benefits to trustees and connected people.
- Poor financial controls.
- Poor decision-making processes.
- Problematic relationships with other organisations.
Some of the reports describe blatant misconduct by trustees, where charities have been fraudulently misused for private purposes. However, there were also many situations where trustees have had the best interests of the charity and its beneficiaries at heart, but things have gone wrong along the way.
What can charities do to avoid these common problems?
Conflicts of interest and unauthorised benefits
Trustees have a duty to act in the best interests of their charity, which means they should avoid situations where their own interests (or the interests of people connected to them) could conflict with the interests of their charity. There were many examples of trustees and connected people receiving salaries and other benefits from charities without any evidence that they had managed conflicts of interest or considered if this was appropriate or lawful.
Charities should have clear procedures for identifying and managing conflicts of interest, and should make sure that trustees and senior staff have appropriate training on the rules and their duties. If you do not already have a conflicts of interest policy, you should put one in place without delay.
Case Study: The Retreat Animal Rescue was scrutinised by the Charity Commission after failing to file its accounts twice. Of the four trustees, two were siblings and two were married to each other. The charity leased a property that was owned by two of the trustees, and subsequently paid off a loan on that property using a donation received from another charity. In addition, a trustee had been paid by the charity for working at the charity’s café without proper authorisation. The minutes did not record any discussion about how conflicts of interest had been managed. The Commission concluded that the trustees were responsible for misconduct and/or mismanagement in the administration of the charity and in breach of their trustee duties. The trustees who had received money in breach of trust were required to repay it to the charity.
Financial controls and record-keeping
In many cases trustees were unaware of the financial transactions taking place in their charity and were unable to provide evidence of how funds had been used and whether payments were made in line with the charity’s objectives. Sometimes this was because of a dominant trustee who was running everything without any checks and balances, and other times it was because of internal disputes on the board or failure to properly oversee and challenge the charity’s staff.
Trustees should ensure they have genuine oversight of their charity’s activities by scrutinising board papers, questioning and challenging staff and other trustees, and having clear delegation and reporting structures in place. Schemes of delegation, role descriptions, terms of reference and codes of conduct can help to ensure that everyone is clear about who is responsible for what and how decisions can be made.
Case Study: Human Appeal was scrutinised by the Charity Commission after a serious incident report was submitted by the CEO regarding a terrorist incident at the charity’s warehouse in Syria. Although staff reported to the trustees at quarterly trustee meetings, the minutes suggested that the trustees were too trusting of the staff and were not robust in their questioning of them. This led to a number of instances where the charity was exposed to risk by internal policies and procedures not being adhered to, and important information being withheld from them. The Commission concluded that there had been misconduct and/or mismanagement by the trustees, and used its regulatory powers to control the trustees’ activities.
Often the Commission identified poor decision-making processes, where there were no minutes to show that trustees had properly considered the risks or taken appropriate professional advice before making key decisions.
Trustees should ensure they have all the information they need before making a decision (taking professional advice if needed). Sometimes this means deferring a decision until the trustees are happy that proper due diligence and risk assessments have been carried out. All trustee meetings and decision-making must be properly minuted and the minutes safely stored for future reference.
Case Study: The Charity Commission scrutinised Afghan Heroes after receiving complaints from the public. Amongst other issues, it found that the charity’s business model was not fit for purpose, it had made significant financial losses (covered by funding received from the public), and it had entered into a number of ill-advised loans and contracts without proper documentation in place. There was no evidence that the trustees had considered all the relevant factors, carried out any due diligence, taken reasonable care in their decision-making, or considered whether their decisions were in the best interests of the charity. The Commission concluded that there had been wide ranging misconduct and/or mismanagement in the administration of the charity, and permanently disqualified two of the trustees.
Relationships with third parties
Some charities in the case reports had a problematic relationship with a third party. Sometimes this was due to a lack of clear separation between a charity and a related organisation such as a trading subsidiary. In other cases trustees had failed to carry out proper due diligence and monitoring on funders or other partners, meaning that grant funding was not properly spent or the charity was paying disproportionate amounts of money for a bad service.
Trustees should be clear about how third party relationships will be monitored, and how the charity can get out if there’s a problem.
Case Study: The Charity Commission scrutinised The Alternative Animal Sanctuary after receiving a report from its auditors. One of the issues identified was that the charity had appointed a third party fundraising agency without taking any professional advice, doing any due diligence, negotiating the terms of the agreement or considering what the risks were and what alternatives were available. The charity had no way to terminate the seven year agreement and it had resulted in only 18% of funds raised from the public going to the charity because the third party was keeping the rest in costs and fees. The Commission concluded that comprehensive failures in governance and financial management amounted to misconduct and/or mismanagement in the administration of the charity. The charity was closed down and the chair and one other trustee were disqualified.
Don’t hesitate to get in touch
Trustees deal with a wide range of difficult and complex issues in running their charities, and we are always happy to have a conversation about anything you might be grappling with. If you need to put in place any of the policies or procedures mentioned in this article, we can support you with this.
Our popular webinar on Being an Effective Trustee helps trustees to understand their legal and governance duties and how to comply with them – a recording is available here.