On 29 January 2016 the Charity Commission published updated finance guidance for charity trustees
- CC12 – Managing a charity’s finances: planning, managing difficulties and insolvency;
- CC19 – Charity reserves: building resilience; and
- The Charity Commission has also updated its popular ‘15 questions trustees should ask’ guide for trustee meetings to better reflect the current social and economic climate
Why have there been these changes?
The Charity Commission has said that it has updated its guidance to make it clearer and more streamlined ahead of a full review of it later in 2016.
What is the new CC12?
CC12 now includes a summary of the application of insolvency rules to charitable companies and unincorporated charities (that is, a charitable trust or charitable unincorporated association) and the liability of directors of a charitable company or trustees of an unincorporated charity on insolvency.
However, it has not been updated for charitable incorporated organisations (CIOs) and does not specifically comment on more unusual structures, such as Royal Charter or Act of Parliament charities or charitable community benefit societies.
What does the Charity Commission recommend?
It recommends that charity trustees review their charity’s financial position and its performance against budgets and future projections at least once a month.
The extent of the review will vary according to the size and stability of the charity. Proper analysis of financial trends and changes in budget predictions may help to assist early identification of financial problems.
Where their charity has to close, the Charity Commission expects trustees to have planned for an orderly shutdown. The guidance covers what is meant by insolvency, and what steps trustees should take if they believe they are insolvent, including getting good professional advice from a firm such as The Endeavour Partnership LLP.
What is new in CC19?
CC 19 confirms that there is no single level or even a range of reserves that is right for all charities and recommends that charity trustees keep their level of reserves under review throughout the year, not just annually.
It includes a helpful summary of how the different types of funds held by charities (such as restricted or designated funds) may affect its reserves policy, explains the rules on reporting reserves policies and sets out an approach to developing a reserves policy for both a smaller and large charity.
Where a charity hasn’t got the reserves it thinks it needs, it is exposed to greater risk and the Charity Commission expects the trustees to address this actively.
What has prompted the changes?
The Charity Commission issued this updated guidance only a few days before the House of Commons Public Administration and Constitutional Affairs Committee (PACAC) published its damning report on the collapse of the charity Kids Company.
This report laid blame for Kids Company’s collapse firmly at the door of its charity trustees, concluding that:
“Trustees repeatedly ignored auditors’ clear warnings about Kids Company’s precarious finances. This negligent financial management rendered the charity incapable of surviving any variance in its funding stream; when allegations of sexual misconduct emerged in July 2015 and threatened to impede fundraising, the charity was obliged to close immediately.”
PACAC found that Kids Company had only a fraction of the reserves recommended for a charity of its size that ran a demand-led operating model (beneficiaries were able to self-refer to the charity). It recommended that the Charity Commission do more to help make charity trustees aware of their responsibility to ensure that their charity has a responsible approach to reserves. The Charity Commission’s updated finance guidance goes some way to achieving this.
Did you know?
Approximately 600 organisations apply to register as a charity each month.
What does this mean?
Competition for funding is very strong. Many charities face a daily challenge of making ends meet, balancing reduced income with potential increased demands or costs. Some inevitably end up becoming insolvent and need to wind up and this is when the Charity Commission expects trustees to seek appropriate legal advice.