Michelle Wright quoted in Public Finance

17th September, 2019

Trust and transparency: examining the UK charity sector

Dogged by scandals and a donations slump, clarity on operations and use of funds is vital if the charity sector is to win back public confidence. Rachel Willcox reports. 

If social media posts from friends asking for sponsorship were a barometer of success, you might be tempted to think the charity sector was in rude health. And yet it’s fair to say the third sector is in the midst of a period of almost unprecedented turmoil – with the combination of economic uncertainty and a backlash from a small number of hefty scandals taking their toll.

The UK’s 168,000 charities are an extraordinarily diverse group – 45% of them have an annual income of less than £10,000, making comparisons with larger organisations such as Cancer Research UK or the British Heart Foundation largely meaningless. But one area that unites them all is the worrying lack of trust in the sector and a growing need for transparency, against a backdrop of growing public expectations.

The safeguarding scandal marked another body blow for a charity sector that was starting to feel it had turned a corner following the fall from grace and ultimate collapse of Kids Company, widespread ‘charity mugging’ – aka ‘chugging’ – fatigue with street fundraisers, and public irritation with direct mail campaigns. As recently as 2005, charities had a basic degree of trust ‘in the bank’, according to the Charity Commission’s own research into public attitudes to charity.

Despite the establishment of the Fundraising Regulator in 2016 and new rules for charity fundraising, the commission’s most recent research into public trust and confidence shows that there is now no premium in being a charity.

“Charities are no more trusted than the average person on the street,” Charity Commission chief executive Helen Stephenson said in a speech in July. A report by research consultancy nfpSynergy in March had aired the same sentiment – it found only 52% of people had trust in UK charities; just 47% thought they were transparent about use of funded money; and the same proportion considered them well run.

General economic uncertainty, caused in part by Brexit, has contributed to an alarming slump in charity donations; the most recent UK Giving survey from CAF, the Charities Aid Foundation, showed that the number of people giving regularly was down for the third year running. And competition for donations has ramped up across the sector.

Meanwhile, the effects of the government’s austerity campaign continue to be felt across the charity sector, as a focus on cost rather than delivery outcomes among local authorities is seeing smaller charities lose out to charity ‘consolidators’ aggressively low-balling to win council contracts.

The race to the bottom also ignores the fact that the most effective way to deliver services is at a microlevel, and that onerous tendering processes mean smaller charities continue to lose out to larger entities that can afford to have dedicated tendering teams.

Paul Palmer is a professor of voluntary sector management at Cass Business School. “The big concern is that local authorities shouldn’t just base their decisions on cost,” he says. “Charities need to do a better job of explaining the value they add. Cheaper isn’t necessarily best – they need to stress their local credentials and clearly show how costs are assembled.”

Karen Cherrett, a charities and third sector expert at advisory firm PA Consulting adds: “Continued austerity and media reports about how some charities have experienced high-profile incidents of financial or ethical misconduct have made donors cautious to contribute – especially without a direct connection to the cause.”

In response, there has been a noticeable shift among charities to promoting legacy funding and small, regular direct debits, as well as looking at mechanisms such as round-to-the-pound donations or maximising Gift Aid opportunities at the point of giving, Cherrett says.

The focus on Gift Aid is something of a moot point, after HMRC warned that claims for incorrect amounts under Gift Aid constitute one of the most common mistakes its staff come across in dealing with charities. Research commissioned by the tax authority, which was published in March last year, estimated that charities were losing out on £600m of unclaimed Gift Aid donations, while £179m is claimed erroneously by people who don’t understand the rules.

'Charities, especially smaller ones, still remain blinded by their cause rather than the need to manage resources to properly serve the cause'
Karen Cherrett, PA Consulting

At the same time, the relative ease with which new cause-led organisations can be set up has seen increasing fragmentation of the market and a proliferation of smaller, specific causes that, instead of creating choice, is confusing donors and diluting funding impact. “This is leading to consolidation and divestment by some bigger players and a move to more commercial approaches and sector partnerships. What we are not seeing, on any large scale, is whole-sector collaboration or shared services for back-office activity to reduce running costs,” Cherrett explains.

Don Peebles, head of CIPFA UK policy and technical, is confident that CIPFA’s position at the heart of financial reporting development in the public sector, combined with its role providing secretariat support for the charity sector statement of recommended practice (SORP) for accounting and financial reporting, adds huge value to the overall cocktail of expertise. “There’s a responsibility for all of us to make clear the message we’re trying to get across to trustees, to stakeholders and all those interested in the charities. They need to do a better job of demonstrating how well they are doing, rather than how well they are run. It’s a difficult balance to strike.”

“One of the underlying narratives is ‘Can you trust charities to spend your money appropriately?’. We’re active in trying to counter some of that in the transparency and integrity of financial reporting,” says Jonathan Orchard, a partner at Sayer Vincent, which boasts 450 clients in the charity and social purpose sectors, including Shelter, ActionAid and the Disasters Emergency Committee. “Telling people how you operate and why it’s the best way to deliver your social impact – that’s an agenda that we haven’t had to tackle before. It’s an important role for finance. The broader financial management rules aren’t enough in themselves to engender trust.

“The charity sector SORP framework is developed around how you apply accounting standards, but a charity can be fully compliant without its accounts telling key stakeholders what they want to know,” Orchard adds. “There’s no reason why you can’t produce your own narrative around that. The principle of making something that is more accessible to stakeholders is a very interesting idea.”

Mark Spofforth, a partner at Kreston Reeves, agrees that impact reporting is a growing part of the charity finance remit, as commissioners and stakeholders rightly demand evidence of a return on their investment. “You need a better message about what you do with your money. It’s much more of a shift to put in stuff around the numbers.”

And yet charities often struggle to focus on the right KPIs, notably ratios of cost to investment, such as people to volunteer effort and revenue to reserves. “Charities typically focus on quantifying where the cash is against the costs. They do not provide a forensic analysis of costs or encourage a discipline of managing for the future. This can lead to a need to use reserves to plug gaps in revenue, fund or top up investment requirements or bail out failing projects,” Cherrett says.

Trustees too are starting to seek much greater visibility of financial and value-based reporting against a set of measures that enable them to see the bigger picture. 

However, financial competency remains very much a work in progress, and a huge source of potential risk to the sector. The Trustee Charity Finance Competency survey, published by Charity Finance Group (CFG) and accountancy firm MHA MacIntyre Hudson, reveals mediocre financial governance and a lack of real commitment to trustee competency and diversity.

Nearly nine in 10 respondents said their charity could benefit from a better understanding of strategic financial governance matters, and 55% do not formally assess the effectiveness of their financial governance. Even though virtually all charities consider it important to have more than one trustee engaged with their finances, only 56% said they make training available.

Caron Bradshaw, chief executive at CFG, said there was a lot more to do to ensure all trustees are engaged in the finances of their charity. “We encourage trustees not to be complacent over the lack of diversity in the boardroom. It needs to be prioritised to ensure people from diverse backgrounds join our boards – better decision-making depends on that diversity of thought and voice.”

Nigel Davies, head of accountancy services at The Charity Commission, tells PF that, bearing in mind the charity sector’s heavy reliance on public support and goodwill in terms of donations, money or time, it is vital they are clear about what they are doing and the difference they make.

“Good reporting is not just about having finances in order and properly recorded but also an opportunity for charities to tell their story and explain to the public what they do and how they use charitable funds.”

Michelle Wright is founder and chief executive of Cause4, a consultancy that helps charities to develop financial models and fundraising capability. She thinks that some charities’ business models simply aren’t fit for purpose and that their funding models don’t support them to change. “There’s a general fear among CEOs that if they say the business model isn’t working they will lose funding from government or big funders. It’s not necessarily a substantiated fear.”

With financial viability at stake, charities are responding, although change has tended to focus on compliance around cash collection and management rather than the fundamentals of good financial governance, Cherrett warns. “Charities, especially smaller ones, still remain blinded by their cause rather than the need to manage resources to properly serve the cause.”

Shrinking commissioner budgets and increased demand for clear evidence of impact and outcomes pose real challenges, as charities look to move away from commissioned services and rebalance their offer so they are less reliant on institutional funding. In May last year, disability charity Scope completed the transfer of all regulated and day services – including 38 care homes, three education facilities and 10 day services across England and Wales together with 1,598 frontline staff – to external providers. This formed part of a new strategy to enable the charity to focus more on advocacy and campaigning.

The challenges of growing in scale while improving financial controls and maintaining effective oversight by trustees should not be underestimated, the Charity Commission’s Davies warns. “Insights from our review work on the quality of trustees’ annual reports and accounts and public benefit reporting show that many charities still struggle with the basics.” 

Weathering the financial backlash

To describe Alison Hopkinson’s tenure in the financial hotseat at Oxfam GB as a rollercoaster ride would be an understatement. Hopkinson joined the charity as finance director three and a half years ago with a remit that includes IT, risk and assurance, legal, procurement and logistics. Around 60% of her 300 reports are based in the finance team.

“The shortage of funds has been a significant financial challenge,” says Hopkinson. “There has been a decrease in trust in Oxfam and in the sector as a whole, regular giving is on the decline, and charity shopping is not meeting our expectations. This year, we had a significant one-off legacy that has made good the gap, but we lost 7% of our regular givers in one month.”

In response, the charity worked with consultants on a restructure to take out 10% of its budget.

“It’s about being nimble to cope with the downturn in income,” Hopkinson explains. “At the same time, we’re still doing scenario planning. If income drops, we have a shopping list of things we do so we can adapt if we need to,” she says.

“The first thing to go is variable expenditure, then capital expenditure – headcount and programmes would be the last things affected.”

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