5 tips for working with charities and NFPs

In 2015-16 the charity sector was plagued with a series of scandals, pertaining to alleged financial mismanagement, poor fundraising practices and inappropriate data sharing.

At the time, economist Dr Canh Dang was in his first year of a PhD – he decided to investigate ways to detect financial misreporting among charities.

He explored the possibility of applying a mathematical tool often used to identify election fraud to the charity sector.

As reported by the London School of Economics and Political Science, the mathematical mechanism, known as Benford’s Law, applies the reasoning that the first number in a set of naturally occurring data is likely to be very small.

One will appear as the first number in around 30 per cent of cases, while two will appear in around 17.6 per cent of cases. The number nine will appear as the first digit in a naturally occuring set of data in fewer than five in 100 cases.

Applying this logic could enable accountants to quickly separate genuine or manipulated data, argued Dang. However, he also noted that the method “does not provide definite evidence of frauds or wrongdoings. To establish this, a full investigation or auditing is still needed”.

Duncan Walker, Managing Director of Duncan Walker Partnerships Ltd and the IFA’s Scotland regional ambassador, agrees with Dang’s conclusion.

“I can see the benefits of using that methodology to identify transactions that may require further investigation. It could give you an indication that you need to look closer, but you really need to verify the transactions themselves,” says Walker, who is also Treasurer of the Duke Street United Reformed Church and has worked with a number of charities and not-for-profits over the course of his career.

“In an ideal situation you would verify 100 per cent of the transactions but that’s not always possible with larger charitable bodies that have thousands of transactions. I would aim to verify the larger transactions or ones that look unusual – for example, transactions that always have round figures could indicate you need to take a closer look.”

However, all general rules need to be considered within a particular context.

“You need to know the norm for a particular charity and industry. You might think that the number five appearing frequently is unusual, but it would be useful to throw a comparison against it to determine if that’s actually the case,” says Walker.

We asked Walker to share his top five pieces of advice for accountants who are working with charities and not-for-profits:

1 Check that there are proper governance procedures

“It’s important that there is structure, good governance and financial controls in place just like in any business,” says Walker. “These help to protect the reputation and aims of the charity as well as their funding.”

2 Identify who can make decisions about expenditure

Is it one or two people, a committee or a group of senior stakeholders?

“Before money goes out of the organisation, it’s always best if it’s sanctioned by more than one person,” says Walker. “I’ve come across many charities that just have one person with access to online banking to make decisions. That’s definitely not best practice.”

3 Check that financial controls and good governance are working in practice

“What intends to happen doesn’t always eventuate,” says Walker. “There needs to be a regular review of good governance and financial controls to make sure that the financial systems in place are supported by the governing body and the whole organisation.

“I’ve seen situations where there has been financial information produced on a regular basis but the people in control on the board of trustees don’t understand the information. It's important that somebody on the board of trustees or a member of staff is able to explain the various reports coming to the board to ensure good governance is being maintained.”

4 Ensure accurate and transparent financial reporting

“Recording financial information should be the same as in any other organisation. Every organisation has income and expenditure. Both of those things can take different forms but the main point is to ensure the income they’re generating has come from legitimate sources,” says Walker.

“You need to verify the sources of income to prevent major issues such as money laundering, and make sure the money is being used for the purposes for which it was given.”

5 Report if you suspect fraud, misappropriation of funds or other suspicious behaviour

There are three charitable regulators in the UK: the Office of the Scottish Charity Regulator in Scotland, the Charity Commission for England and Wales and the Charity Commission for Northern Ireland.

“If you have any suspicion you need to report it immediately,” says Walker. He’s careful to point out that accountants should not put off reporting or action because they have ‘only’ a suspicion – concrete evidence is not the reporting benchmark.

“It’s really important that accountants take this step if they suspect fraud or financial misuse. If they don’t they can be prosecuted because it’s a criminal offence to not report. You don’t need to advise the client; in fact, in most instances, the regulatory body advises that you don’t.”

In Walker’s experience, most charities have good intentions but many are run by employees or volunteers without governance or financial expertise. He says there can also be an assumption that everyone who works at a charity has the good of everyone’s interests at heart, but unfortunately, that isn’t always the case.

Accountants play a critical role in supporting leaders to run charities effectively, legally and ethically.

“If you don’t have good governance and financial controls in place, then actions can be taken that aren’t in alignment with the organisation’s charitable objectives,” says Walker.

“The moment there’s financial mismanagement that can be attributed to a charity, then the reputation of that charity becomes tarnished. Any good work they have done in the past or that they intended to do in the future is compromised.

“The adoption of governance processes and financial controls helps to ensure that doesn’t happen.”