Charities warn that government audit plans are ‘unworkable and inappropriate’

14 Jul 2021 News

Oxfam, Citizens Advice and the British Heart Foundation have backed calls for the government to rethink its proposals for audit reform.

They are among 15 charities which have endorsed a response to the government proposals published yesterday by the Charity Finance Group (CFG).

CFG said that the changes would increase red tape for charities by “shoehorning” large voluntary organisations into financial regulations designed for the private sector.

Its response also argued that large charities could find it harder to recruit trustees and could be forced to divert money away from charitable activities if the reforms went ahead.

New regulation

The charities were responding to the white paper Restoring Trust in Audit and Corporate Governance, released earlier this year by the Department for Business, Energy and Industrial Strategy (BEIS).

One proposal would make senior staff at charities with annual incomes over £100m personally liable for errors in the accuracy of financial reporting, and potentially face bans or fines.

Those charities would be classed as “public interest entities” (PIEs) and regulated by a new body, the Audit, Reporting and Governance Authority (ARGA). ARGA would have powers to act against chief executives or senior staff suspected of making misleading statements about company finances.

‘Unworkable and inappropriate’

The government says that the reforms are aimed primarily at identifying and preventing financial problems at large private companies. CFG argued that this is ill-suited to the voluntary sector given that “there have been no comparable economic failures in charities in the over £100m income bracket”.

The CFG paper added: “The extension of the PIE regime to charities due to their size, and especially to those meeting the classification for any third sector organisation with incoming resources in excess of £100m, requires more detailed consideration, including a full and proper targeted impact assessment for the third sector to ensure that the government’s aims are indeed applicable, proportionate and align with existing thresholds for reporting and governance.”

It also said: “CFG’s view is that the personal liability potentially inferred upon charity trustees as a result of the PIE classifications are largely unworkable and inappropriate in the charity context.”

Additional cost

CFG warned that any additional costs created for charities as a result of extra regulation could divert resources away from charitable work.

Its paper said: “Increases in costs for compliance in the charity context come out of funds for the purposes of addressing beneficiary need and delivering public benefit rather than from profits that are to be distributed for private benefit.” 

CFG warned that if potential trustees were discouraged by the new rules, this would “reduce the pool” of potential board members.

Charity Commission opposed to proposals

The Charity Commission has already raised its concerns about the proposals.

A spokesperson for the regulator said in February: “We consider that there are ways to strengthen the transparency of larger charities using existing reporting processes that do not create additional regulatory and reporting burdens, as would be the case were the PIE regime extended to some charities.

“Were the PIE regime extended to charities, engagement with the charity sector would be needed to modify the regime to make it better reflect the nature of charity governance and the obligations of trustees.”

The Commission confirmed that it has sent a formal response to the BEIS consultation.

CFG: Government must not increase burden 

Caron Bradshaw, the chief executive of CFG, said: “The government’s drive to increase trust and transparency is to be welcomed by all. 

“However, we need to break this long but flawed habit of shoehorning charities into regulation and legislation designed for the for-profit world to avoid the unintended and harmful consequences such an approach brings about for the third sector.

“The robust legal and regulatory environment that charities operate within is not ‘less than’ that applied to private enterprise. 

“Government must ensure that it does not increase the burdens and costs placed on charities without there being a compelling case and a corresponding level of benefit, otherwise it will be guilty of reducing their ability to deliver effectively for their beneficiaries at a time of high demand and constrained resource.

“We thank our member charities and corporate partners for working closely together to formulate this important response. And we look forward to working more closely with government on designing policy that increases trust and transparency whilst remaining appropriate and proportionate.”

The full list of charities endorsing CFG’s response is: British Heart Foundation; Bond; Christian Aid; Citizens Advice; Great Ormond Street Hospital Charity; NCVO; National Trust; Oxfam; Pilotlight; Royal British Legion; RNLI; RSPB; Save the Children Fund; Save the Children International; and Sightsavers.

The BEIS consultation closed last week. BEIS is now analysing the consultation responses and says it will respond at a later date.

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