Charities play a significant role in the fabric of our national life but they are being scrutinised more closely than ever. The public expects charities to operate to the highest standards with the funds entrusted to them, and it is therefore crucial that they are honest and transparent about the difference and impact they are making. As well as being open, they also need to be resilient and financially sustainable to succeed.
Our latest Audit Insights report sets out a number of recommendations made by auditors working in the sector to help charities demonstrate their impact and become more resilient and transparent. The recommendations are directed at trustees, regulators and standard-setters, auditors, supporters and funders, and commentators on the charity sector. But they will also be useful to ICAEW members engaged with the charity sector, whether as trustees or volunteers, auditors and independent examiners, or donors.
Investment in leadership and infrastructure key to success
Our report recommends that charities need to invest more on infrastructure and support functions to maximise their positive impact. They are encouraged to apply the methods, technologies and approaches demonstrated by other sectors, and to reconsider their operating models when facing difficulties.
Investing in leadership is also important. Trustees are ultimately responsible for their charity, and appropriate knowledge of their roles and responsibilities is vital if they are to provide effective stewardship. Charities need to focus more on the selection, induction and training of all trustees to ensure they have the right skills and experience to fulfil their roles and deliver better governance.
Like all successful organisations, charities also require the necessary infrastructure to ensure that they have the right IT, financial systems, skills, income generation processes and effective governance and management. Some charities are reluctant to increase spending in these areas because they believe it will impact negatively on how they are perceived by stakeholders. However investment in training, evaluation, internal systems and fundraising will improve efficiency and effectiveness. The risk is that underinvesting in infrastructure can actually lead to a deterioration in a charity’s performance. In addition, charities should tell their story in a way that helps funders and the public to understand and support this investment.
Cost ratios and measures of how, and where, funds are distributed are often used as a proxy for effectiveness and efficiency. The fact is that in almost all cases such measures are flawed and lead to inaccurate conclusions. Stakeholders and supporters should not focus on the percentage of charity expenses that go on administrative and fundraising costs. While ratio analysis can help charities to identify problems and serve as part of their dashboard of financial management data, they tell us very little about the impact of a charity’s work.