Around one in every seventy charities with incomes over £1m was identified as facing potential financial difficulty by its auditors, according to a Charity Commission report.
The Charity Commission reported that 94 charities with incomes over £1m, out of a total of around 7,000, included an “emphasis of matter” paragraph in their annual accounts.
An “emphasis of matter” paragraph is included in a charity’s accounts when the auditors believe there is something of such fundamental importance that it affects the reading of the accounts, but does not prevent the charity continuing as a going concern.
This usually but not always means there is a significant danger to the future of the charity.
The “emphasis of matter” definition is not the only indicator of trouble. Auditors may also warn that a charity is not a going concern, or qualify their opinion of the accounts. In the case of severe financial difficulties, charities may well not file accounts at all.
Reasons for financial distress included:
- The difficult economic climate (22 charities)
- Dependence on public sector funding (22 charities)
- Set up or restructure costs (13 charities)
- Pension scheme deficits (12 charities)
- Unplanned overspends (12 charities)
- Funding uncertainties (7 charities)
- Contingent liabilities (6 charities)
The report found that nine of the 94 charities had now ceased to operate, while 10 were substantially restructuring their activities.
“Our review has highlighted the challenges that the difficult financial environment presents for charities and some of their strategies for dealing with them,” the Commission said in its report.
“Whilst the appropriate response will vary according to the charity’s circumstances, charities should remember that reviews of the efficiency and effectiveness of their operations and services are as important as planning to expand activities, which has its own risks, and seeking additional funding.
“Collaborating or merging with another charity, or even winding the charity up, are also options that charities should be ready to use.
“Our review has also highlighted the difficult but crucial role that charity trustees and their senior management have in managing situations of financial distress.
“The charities in our review included several examples of both financial recovery and orderly closure. However, this was not the experience of most of the charities. Three quarters of those charities that have submitted more recent audited accounts remain in financial difficulty and 7 other charities that had expected to be able to continue ceased to operate before submitting another set of accounts.
“Our findings indicate that charities reliant on public sector funding and/or fixed term contracts or grants may be particularly vulnerable.”
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