Buzzacott recently hosted a webinar exploring the role of a trustee in ensuring the effects of Covid-19 are properly addressed within charity financial reporting requirements. The webinar panel included experts from the Buzzacott Charity team: Katharine Patel, Amanda Francis, Shachi Blakemore and Edward Finch. Read the key insights below or watch the recording on Buzzacott’s YouTube channel now.
Overall planning and accounts preparation
The Covid-19 pandemic has had wide-reaching implications for the governance and financial sustainability of charities at a time when there is a huge surge in demand for their services.
Trustees must understand how their organisation is impacted and the uncertainties created. Risk management processes should be updated with the aim of mitigating the effects of the pandemic, and you will need to consider the effect of working remotely on the charity’s financial controls, reporting and audit. Critical to financial planning is cashflow forecasting, liquidity and reserves management.
The Charities Statement of Recommended Practice (SORP) Committee issued specific advisory guidance which provides suggestions for the level of information included within the annual statutory financial statements, both narrative and financial. Should the possible impact be severe and risk the charity’s future viability, there are likely to be both accounting and audit considerations regarding going concern.
Trustees’ reporting considerations
The trustees’ report is one of the main tools at a charity’s disposal to demonstrate good governance, making clear that the trustees have identified the effect of Covid-19, associated risks, and a mitigation plan. It can also help explain the financial effect of Covid-19 on the charity.
The report should address three aspects in relation to Covid-19:
- Setting the context and explaining the social and economic impact.
- Operational impact on the demand and delivery of the charity’s work – now and in the future, telling the story of the charity and Covid-19.
- Financial impact: pressure on income such as grants, donations, fundraising, investment income and fees for services; impact on expenditure – staff costs, furlough receipts, deferred project spending etc.; impact on asset values – particularly investment and property assets.
After addressing the above, the following report aspects may need rethinking: the charity’s reserves policy, future plans and operational and strategic risks, requiring different mitigating actions and new ways of working.
Charities will need to focus on areas that require estimates and judgements in their accounts this year, including year end provisions, legacy income recognition, holiday pay accrual etc.
There may be areas that have crystallised this year which normally would not have been an issue. Cancelling or deferring events planned for the next financial year may result in costs which would have been carried forward to the next period to match the income from the event, now needing to be written off at the year end.
Charities will also need to consider the value of various balance sheet items at the year end, such as fixed asset properties. If your organisation has bank loan covenants, there may be a greater risk of non-compliance this year if the results are significantly adverse.
For year ends up to February 2020, the additional subject matter considerations for auditors will largely be confined to post year end events and ongoing financial viability. For March 2020 and later, there will be some impact on the year under audit and agreement of the appropriate treatment of this.
Logistical audit challenges during the lockdown period include a charity’s ability to produce the report, accounts and supporting workings. These are exacerbated by the absence of furloughed staff, poor access to office systems or reliance on paper records. Other limitations include verifying the existence of assets such as stock, new fixed assets, or verifying the completeness of accounting records.
Auditors will require far greater detail regarding assumptions made and disclosure of these assumptions in reports and accounts, even where trustees conclude that there is no material uncertainty regarding going concern. Emphases of matter and audit reports flagging a “material uncertainty related to going concern” will be more prevalent. Drawing attention to uncertainty does not represent a qualification of the auditor’s opinion, or disagreement with the trustees’ use of the going concern basis of accounting.