Smaller charities face a disproportionate regulatory burden, ICAEW members are warning, as calls to revisit the audit threshold across the Third Sector continue. Audit and accounting rules, complex laws relating to legal form, and duplication of effort due to the filing requirements of both Companies House and the Charity Commission are among the biggest frustrations cited, following a call for feedback from ICAEW’s Charity Committee to its members.

Heather Dunlop is an ICAEW member and co-founder at Contando, a practice with a majority of small charity clients with turnover typically up to £2m. Previously, she worked as the Head of Financial Accounting and Governance at a large national charity and sat on the Finance and Audit Committee for YMCA England for three years. 

“I have come across frustration from charities about some of the judgemental areas of accounting rules such as income recognition under the Charities Statement of Recommended Practice, particularly as different accountants and auditors take different views,” Dunlop says. “Additionally, the need for some charities to maintain a trading subsidiary for tax purposes can be a frustrating complexity, requiring expertise that small charities don’t always have.” 

Navigating multiple regulators

Depending on their activities, charities can also fall under scope of other regulators. Feedback from members in charities is that it’s difficult to navigate a regulatory environment where multiple regulators are involved. 

Smaller charities with fundraising operations also face data protection and privacy burdens, although concerns about these are similar to those experienced by smaller businesses outside the Third Sector. Similarly, the complexity of safeguarding and health and safety rules, although not charity specific, can prove challenging for small not-for-profit organisations with limited resources, Dunlop says.

“There is pressure to keep overhead costs low and discussions about the right percentage to spend on them,” Dunlop explains. “This leads to charities not investing in training for ‘back office’ finance staff or trustees, or avoiding paying for external expert support.”

It’s one of the reasons why ICAEW is calling for a consultation on the £1m threshold for charity audits, bearing in mind it was last updated in 2015. Static thresholds mean that increasingly smaller charities fall under more complex regulatory regimes. 

Raising charity audit threshold – a double-edged sword

However, Dunlop admits that raising the audit threshold is a double-edged sword. “Charities that are not audited don’t have the ‘burden’ of an audit but also don’t have the benefit of the advisory support that auditors can offer. If the burdens are to be reduced for smaller charities, we also need to consider what would be lost – would it open up increased fraud risks, for example. Smaller charities can be susceptible to this due to reliance on a small team and high levels of trust.”

Marie Langan, Regional Manager for the South West at Cranfield Trust, which provides free management support and training to social welfare charities, says it’s about balancing the need for regulation with proportionality. But it’s also important to ensure trustees have access, support and funding to be trained appropriately and develop the requisite skills to meet regulatory requirements: “The Charity Commission has responded with initiatives such as its five-minute guides for charity trustees and the My Charity Commission account, which allows trustees to sign up for useful updates. Technology can be a fantastic help, but it can also add another burden to some organisations, especially smaller ones, so we need to make sure that it remains accessible and inclusive.”

Free training for trustees

ICAEW, in collaboration with charity sector experts including Cranfield Trust, NCVO and the Charity Commission, has produced free trustee training modules covering areas including legal and financial responsibilities, risk management and managing board dynamics.

ICAEW member Jen Richardson runs a practice currently servicing around 35 charity clients. She is also an Independent Examiner and a charity trustee. Rather than reducing the regulatory burden, she believes that upskilling trustees should be a far bigger focus: “There are too many people within charities – either as volunteers or as paid staff – who don’t understand what their obligations are. Personally, I don’t think there should be any less regulation, because charities are recipients of public money and they need to be good custodians of it. We need those checks and balances.

“I value trustees enormously, but they need to be given clear access to resources either by the Charity Commission or by their advisers. Trustees don’t know where all these brilliant resources are, they don’t think about the core purpose of why they’re there, and they don’t think about why regulation is a good thing.” 

Charity banking concerns

Elsewhere under the regulatory banner, banking issues are consistently cited by members as a source of concern – in particular difficulty in opening accounts, accounts being frozen or closed without warning, and lengthy delays in implementing new mandates. In November last year, UK’s charity regulators wrote a joint letter to request urgent action.

Kristina Kopic, ICAEW Head of Charity and Voluntary Sector, says: “We hear regularly that charities, particularly smaller and unincorporated ones, are facing a myriad of obstacles to their banking needs. These include the reluctance of high street banks to offer accounts with appropriate internal controls, freezing of accounts due to identification issues, inadequate customer service, high charges and lengthy delays in implementing new mandates.”

While this certainly isn’t about having no regulation, ICAEW says the focus needs to be on using regulation only where necessary, implementing it well, and ensuring its use is proportionate and future-proof, as outlined in its response to the previous government’s Smarter Regulation consultation published in January. 

• Heather Dunlop is one of the speakers at a free ICAEW virtual event on 22 October to guide small charities through financial governance challenges. Find out more and book your place.
• In line with ICAEW’s CPD Regulations, members who volunteer as charity trustees should complete training each year that is specific to those duties. Find out more about ICAEW’s dedicated training course for charity trustees.