Compliance Pitfalls To Avoid

Julie Mutton discusses key themes from the Commission's assessment of compliance cases.

The Charity Commission has published the results of its compliance work during 2009/10 in Charities Back on Track. As well as explaining the different levels of intervention applied by the Commission and the numbers of such cases dealt with in the year, the report also highlights the themes identified as those that typically give rise to difficulties. Case studies are explained along with analysis of issues for other charities to consider.

The Commission's compliance division carries out its statutory function to identify and investigate apparent misconduct or mismanagement in the administration of charities. Investigations also cover situations where assets, beneficiaries or reputations are at serious risk.

Following an initial assessment, some cases will need further intervention. These may range from monitoring and supervision of charities, where there is concern that there might be serious non-compliance, to 'Statutory Inquiries' under Section 8 of the Charities Act 1993. Such investigations will be opened where there is, for example, evidence or serious suspicion of misconduct or mismanagement in the administration of the charity.

Key themes

The assessments undertaken during 2009/10 highlighted key themes; these are discussed here.

Poor governance

The legal duty of a trustee is to run the charity solely in the interests of the charity. Some two-thirds of the Commission's assessments involved failings in trusteeship and governance involving typically:

• inadequate management controls
• failure to manage conflicts of interest
• situations where trustees are benefitting inappropriately from their respective charities
• dominant individuals at board level.

Financial mismanagement

Some £21m was lost to charities in the theft and fraud cases that were reported to the Charity Commission in the year. It is most likely that the total lost across the sector is well in excess of this amount as not all instances of fraud and theft will have been identified. Not all mismanagement, however, relates to fraud or theft. Pitfalls that can attract the interest of the compliance division will include:

• alleged misapplication of funds
• fundraising practices in breach of guidelines
• high support or administration costs
• low levels of 'charitable expenditure'
• high staff costs
• poor financial controls or record keeping
• failure to file accounts and returns with the Commission, or filing of accounts that do not comply with the Charities SORP.

Vulnerable beneficiaries

Many charities' activities are for the benefit of children or vulnerable adults and trustees have a duty of care to those beneficiaries – safeguarding procedures are essential for their protection. The Commission was involved in investigations concerning suspected or alleged actual abuse in a number of instances. However, more often the Commission's intervention related to the failure of charities to have in place appropriate safeguarding policies and practices at all. Trustees of such charities must ensure that appropriate safeguarding procedures are demonstrably in place in their respective charities and that there is effective monitoring to ensure that the policies are adhered to rigorously.

Inappropriate political activity

While charities are entitled to carry out political activities that support their charitable objectives, they must be, and be seen to be, independent from party politics. Failure to adhere to this principle damages the independence and reputation of the relevant charity. Political donations may not be made by a charity and support may not be given to a particular party. In the period running up to the 2010 General Election, a greater number of cases involving political activity and campaigning attracted the attention of the Charity Commission than would normally be the case. Trustees need to take care not to cross the sometimes fine line between what is and what is not permissible.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.