The Regulator for Charities in England and Wales
(Version June 2004)
Charities play a rich and varied role in modern society but their continued success is dependent upon the public’s trust and confidence in their work. The Strategy Unit (SU) report Private Action, Public Benefit recognised this link, with the government’s response to the report commenting that "…easy access to accurate and relevant information about charities is essential for real accountability, and for trust and confidence in charities." (1) A number of the SU’s recommendations have a direct impact on charities’ transparency and accountability. One of these recommendations, that larger charities complete an annual Standard Information Return (SIR) about their work, achievements and impact, is currently being piloted in consultation with the sector. Another recommendation, included within the draft charities Bill, gives the Charity Commission a specific statutory objective to enhance the accountability of charities to donors, beneficiaries and to the public. These changes, together with the development of Guidestar-UK (a new information portal displaying information from charities’ Annual Reports and Accounts plus supplementary material) will help to increase the amount of information available to stakeholders and so increase charities’ accountability.
The Charity Commission interprets transparency and accountability as providing relevant and reliable information to stakeholders in a way that is free from bias, comparable, understandable and focused on stakeholders’ legitimate needs. This report looks at what people think is important in this area and examines the level of transparency and accountability a charity demonstrates in its reporting. We consider compliance with the Statement of Recommended Practice (SORP) to be the minimum standard of accountability, particularly for the largest charities. The forthcoming SORP review consultation will create a focus for better reporting of charities' objects, achievements, results, and impact.
This report presents the findings of an analysis of the information provided in the Annual Report and Accounts and the Annual Review of a sample of 200 of the largest charities. The analysis was not designed to assess of the extent of SORP compliance in the sector. Instead it assessed the extent to which the charities in the sample had gone beyond minimum requirements to provide information that accounted fully and transparently for their performance during the year.
Our evidence is that the general standard of performance against the transparency and accountability framework is not satisfactory. Whilst there are some very good examples, too many charities in our study did not meet basic requirements. We hope that charities will take both this message and what the report shows about good practice to heart and respond constructively.
John Stoker
Chief Charity Commissioner
The Charity Commission takes the view that accountability is a charity’s response to the legitimate information needs of its stakeholders. It is important that interested parties can easily obtain relevant and reliable information on a charity’s financial position and performance, deployment of resources, organisational structure, policies, priorities, activities and achievements.
A high level of transparency when accounting for performance allows trustees to:
The Charity Commission is one of many stakeholders that has a legitimate interest in how charities use their resources, and the Annual Report and Accounts are one of many ways in which charities communicate with their stakeholders. Nevertheless, the Annual Report and Accounts should provide adequate information to allow stakeholders to assess the overall performance of a charity, including sign-posting to where additional details may be obtained.
In order to gauge how far best practice in transparency and accountability is being followed among the largest charities in the sector, the Charity Commission carried out an objective analysis of the Annual Reports and Accounts of a sample of 200 of the largest charities, plus an examination of their Annual Reviews and websites. Our analysis was not designed to assess the extent of SORP compliance in the sector; it examined SORP compliance as a base line of accountability and went further to test how far charities are transparent in accounting for their performance. The accessibility of the information contained in Annual Reports and Accounts, Annual Reviews and websites was therefore a key feature of the analysis. Detailed findings from the analysis are set out in the main body of this report. (2)
The Annual Report and Accounts for each charity, and Annual Review where available, were examined by reference to several criteria:
Our analysis focused on three key issues for transparency and accountability:
We commissioned an independent telephone survey of 1,000 members of the public to investigate their views on the information made available by charities. The results show that the public consider the principles of transparency and accountability to be important. (3)
The results show that information about the areas of activity on which charities have spent their money was considered to be the most important. The charity's registration number was least important to respondents. Mean scores indicate that respondents considered it important for charities to provide information covering all the areas mentioned in the survey. (4)
60% of respondents said that the ability to compare important information between charities would affect their decision about which charity to support, while 35% said it would not affect their choices. Respondents used various sources to get information about charities. The media was used most often: 60% of respondents. Most respondents used more than one source.
The 200 charities selected for this study had a financial year end of 31 March 2003, incoming resources of £7.2bn (approx. 22% of sector income) and outgoing resources of £7.0bn for that year. At the year end they had total funds (excluding endowments) of £5.9bn and free reserves of £0.9bn.
Trading income and grants and fees from central and local government were the main sources of income for nearly 75% of the charities surveyed. The main forms of expenditure for 87% of them were providing services to beneficiaries, providing grants and financial assistance, and providing buildings, facilities and open space.
The following areas of accountability are required by the Charities SORP and were covered by over half of the sample in good detail and were easy to find in their Annual Report. These disclosures were covered to the highest standard by the sample group.
| Disclosure |
No. of charities that provided good detail that was easy to find |
| List of trustees at year end and who served during the year |
188 |
| Statement of the charity’s statutory objects |
161 |
| Explanation of the charity’s aims and mission |
152 |
| Statement concerning reviewing risks |
147 |
| Explanation of the charity’s policy on reserves |
131 |
| Achievements for the year |
126 |
Charities were marked as providing no details in their Annual Report most often with respect to the following required disclosures. These represent the areas in which charities performed worst.
| Disclosure |
No. of charities that provided no detail |
| Summary of specific investment powers |
106 |
| Explanation of grant-making policies |
97 |
| Comment on performance of investments |
95 |
| Narrative relating to the contribution of volunteers |
82 |
Charities provided the following best-practice disclosures, not required by the Charities SORP, in good detail and in a way that was easy to find. These represent the areas in which charities in the sample were good at going the extra mile in their Annual Report.
| Disclosure |
No. of charities that provided good detail that was easy to find |
| Explanation of how major risks were monitored / controlled |
95 |
| Provision of useful ratios |
72 |
| Comment on major sources of income and expenditure |
71 |
There are no requirements to produce Annual Reviews and they are not subject to any audit scrutiny or consistency checks. 121 of the 200 charities in the survey produce an Annual Review as well as their Annual Report and Accounts and, of these, 83 were available for this study.
The style, structure and content of these Reviews were much more attractive and user-friendly than for Annual Reports. The main purpose of most of the Reviews seemed to be to provide general publicity for the charity. A significant proportion were also clearly aimed to help with fundraising, and some seemed to be designed to act as an enhancement to the Annual Report.
For a significant number of charities, poor disclosure of required information in the Annual Report (particularly about activities, achievements and outcomes) was compensated by presentation of these details in the Annual Review. While it is good that this information is being given, Annual Reviews cannot not be used as a substitute for Annual Reports.
We categorised charities by activity, main source of income and main type of expenditure. We then analysed whether different groups had different levels of transparency and accountability or different areas of strength/weakness.
Charities of the following types were significantly more likely to meet or exceed minimum standards:
Charities of the following types were significantly less likely to meet or exceed minimum standards:
Transparency of reporting is increasingly important in charity management. Funding bodies and the wider public demand evidence of efficient stewardship of the funds they donate, as does the Charity Commission. Our findings support a general feeling among sector commentators that there is still scope for improvement in the level of transparency and accountability.
Our continuing initiatives designed to improve the level of transparency and accountability include:
We welcome initiatives such as Guidestar-UK and The Charities’ Accounts Awards, both of which encourage charities to make information available to stakeholders in a way that facilitates their assessment of charities’ performance. Some charities are actively recognising the importance of accountability by presenting a statement of their commitment to providing relevant information, including an action plan of how they intend to deliver on their stakeholders’ information needs.
Charities should take the lead from these best practice examples to improve their own transparency and accountability.
The main focus of this study is the transparency with which trustees account for the activities of their charity in the Annual Report and Accounts, covering legal requirements, recommendations of the Charities SORP and developing good reporting practice.
Many charities in our study produce an Annual Review as well as an Annual Report. An Annual Review is not required by law and its contents are not subject to any regulatory requirements. (5) Our research included an analysis of the information that charities make available in their Annual Reviews and websites. The aim was to determine whether charities are using their Annual Reviews to provide information that should be included in the Annual Report and also to see how far Annual Reviews and other media are used to enhance charities’ transparency and accountability.
The Annual Report should provide a focal point for all accountability by containing the information required by law and the Charities SORP. (6) Further accountability may be achieved through various forms of communication, reflecting the various needs of stakeholders. (7) Most charities produce a considerable amount of material about themselves and their activities, particularly where donations, legacies and similar income provide the charity's main incoming resources. Sign-posting from the Annual Report and in other media to where additional information can be found enhances the transparency of trustees’ accountability for their charity’s activities. See annex A, table 13 for details of the linkages provided by charities.
Sign-posting cannot be used as a substitute for inclusion of mandatory information in the Annual Report, however. This study makes clear the areas in which reporting is a requirement and indicates where best practice suggestions can enhance that basic level of transparency and accountability.
Charities reliant on donations and legacies as their main source of income were particularly good at:
Every charity with a gross income or total expenditure in excess of £10,000 must prepare an Annual Report and Accounts and file them with the Charity Commission no later than 10 months after the end of their financial year. (8) Both documents must comply with the requirements set out in statute and should follow the methods, principles and disclosures set out in the Statement of Recommended Practice: Accounting and Reporting by Charities (the Charities SORP) or a more specialist SORP where relevant.
The Charities SORP sets out how a charity should report on how it has used the resources entrusted to it and on the activities it undertakes. Preparing the Annual Report and Accounts in accordance with the Charities SORP will not only ensure that a charity meets its legal reporting duties but will also help to provide stakeholders with a clear understanding of the nature and extent of a charity’s work.
The Charities SORP applies to all charities in the UK, except where another SORP applies (e.g. Further and Higher Education or Registered Social Landlords). (9) The Charity Commission expects all charities to comply fully with the relevant SORP unless there is good reason to diverge, in which case any divergence must be clearly explained in the Annual Report and Accounts. A failure in SORP compliance could indicate a failure of trustees’ duties to administer a charity properly. We may take regulatory action if trustees cannot adequately explain their failure to comply with the Charities SORP.
We are committed to encouraging charities to submit statutory reports on time. A number of initiatives are ongoing:
To comply with legal requirements, trustees must submit their Annual Report and Accounts to the Charity Commission within 10 months of their financial year end. Timely submission also demonstrates to stakeholders that the charity is willing to be accountable to the regulator.
We make charities’ Annual Reports and Accounts available to other stakeholders through the following means:
Some charities facilitate this availability themselves by publishing their accounts on their website or distributing them to members, and we welcome this. Charities must make their Annual Report and Accounts available to anyone on request (Charities Act 1993, part V1, s.47 (2)).
Our analysis examined the timeliness of submission of Annual Reports and Accounts to the Charity Commission and the stages that charities’ Accounts go through before filing. The results are as follows:
| Stage |
Average time taken (days) |
Range (shortest - longest time period-days) |
| Year end — Trustee sign off |
154 |
52 - 308 |
| Trustee sign off — Auditor sign off |
5 |
0 - 91 |
| Auditor sign off — file with the Charity Commission |
93 |
3 - 234 |
| Total (year end to filing with the Charity Commission) |
252 |
The Annual Report and Accounts are a key part of accountability and should be made available to all stakeholders as soon as possible after the period to which they relate.
Trustees should file their Report and Accounts as soon as possible; there is no reason to hold on to them for so long after the auditor has signed them off.
Timeliness of submission is not sufficient if the Report and Accounts are of a poor quality.
There is room for improvement here. We are disappointed that these kinds of errors appear in Reports and Accounts of charities of this size.
Our analysis showed little overlap between the various channels that charities use to communicate with their stakeholders.
(See table 21, annex A for a breakdown of the areas in which information was additional or duplicated.)
This lack of duplication could be due in part to the fact that the documents are targeting different audiences. The style and presentation of the Annual Report and Accounts suggest they are mainly designed for the regulator whereas the Annual Review appears to be used for more general publicity and fundraising purposes.
Annual Reports often give little information about activities and achievements during the year or only contain high-level information about activities; extra information of this kind is given in the Annual Review. We considered that a significant number of the Annual Reviews were more "reader friendly" and visually interesting than the Annual Reports, making greater use of different type styles, photographs, diagrams and quotes from beneficiaries. Nevertheless, we judged 95% of the Annual Reports to be easy to read, incorporating good use of headings, clear narrative etc. It is good practice to present information in an accessible style, free from jargon, so it is encouraging that the majority of the charities we analysed are presenting their information in a transparent way.
Of the 83 Annual Reviews we examined:
This compares to the following use of presentation aids in Annual Reports:
Charities provided information in their Annual Review that was additional to the Report in the following areas:
On a few occasions, the title given to the Annual Review was "Annual Report", even though in each case there was a separate Annual Report produced in compliance with section 45 of the Charities Act 1993 attached to the Accounts. Also, some charities produced a combined Annual Report and Accounts/Annual Review document. Whilst there are some benefits to having everything in one publication, this could cause confusion as to which parts of the booklet are the statutory documents. When charities produce a combined document, it is important that they correctly label each section to clarify which section is the Annual Report.
In other instances the Annual Review related to several "associated" charities (e.g. Registered Social Landlords) or, conversely, a regional body produced an overview of the year’s activities. This could be confusing and compromise the transparency of charities’ reporting. Trustees should ensure that it is clear to which charity an Annual Review relates.
Some charities are clearly making use of Annual Reviews in a way that enhances the level of accountability provided by the Annual Report and Accounts. This is good practice as it allows charities to provide extra and more detailed information that does not belong in the Annual Report. To make the most of this potential, charities should ensure that they tell readers where the extra information is. Tables 13 and 24 show that trustees do not currently make the link from their Annual Report to other communication media to the extent that they might.
The Annual Reviews we studied were downloaded from websites, obtained on request from the charity, or retrieved from our records if charities had filed them at the same time as the Annual Report and Accounts.
Annual Reviews are an important means of providing extra information to stakeholders that the Annual Report and Accounts do not cover or cover in a way that is less accessible to the lay reader. To maximise the benefits of an Annual Review in enhancing transparency and accountability, charities should give more consideration to the ease with which stakeholders can obtain a copy of their Annual Review.
Websites can be a key source of information about a charity’s activities and priorities.
When obtaining the Annual Reviews for this research, we found the majority of charities' websites fairly easy to navigate but some were perplexing and cumbersome, taking at least 10 hits to locate the relevant page. With the increasing use of the web by all types of stakeholder, charities should give more consideration to their website as a means of providing their Annual Report and Accounts and their Annual Review.
As best practice, trustees should:
Illustrative examples of best practice include:
A charity established to help the blind produces a version of its Annual Review in Braille. Another charity working in a similar field produces its report in a larger typeface to help its beneficiaries read it.
Welsh charities that produce their Annual Reviews in Welsh as well as English.
An Annual Review in the form of a desk calendar to improve its impact and accessibility.
An Annual Report containing a visual representation of the charity's priorities for the year, with their beneficiaries at the top of the chart providing the focus.
The Charities SORP states that, as part of explaining what the charity is set up to do and how it is going about it, the Annual Report should include "an explanation of the objects of the charity. This should be by reference to the governing document but may also include the mission statement of the charity" (para 31).
Transparency and accountability require that a charity explains what it is set up to do and what its activities are in that context. The charity’s objects are the legal basis and rationale for its existence and should inform everything it does. A statement of objects in the Annual Report, plus a statement of aims and mission, enables stakeholders to see the charity’s purpose and how all other elements of the Report relate to its achievement of that purpose.
Our analysis of 200 Annual Reports found that:
Of the 11 charities that gave no details about their objects, 36% gave good details about their aims and mission instead.
Charities which provide little or no information about their objects, aims and mission are failing in a key aspect of transparency and accountability. There is room for improvement in this area.
The registered number of a charity is evidence of a charity's status and that its objects are wholly charitable; the Charity Commission will not register an organisation unless satisfied that its objects are wholly charitable and of public benefit. There are a number of exceptions and exemptions to registration but all the charities in our sample were registered. All Annual Reports should disclose the charity’s registration number so that stakeholders can easily identify the organisation, verify that it is a registered charity and make further enquiries about the charity if they wish.
The registered charity number is basic information that should never be omitted from information provided by a charity, even where it is not specifically required by their SORP.
Transparency in the Annual Report includes disclosure of a charity’s type. The ease with which stakeholders can allocate a charity to an appropriate category is made more important by the increasing use of comparative data about charities; meaningful comparisons can only be made if stakeholders can compare like with like.
Our analysis included an attempt to categorise the charities in four different ways – by governing document, activity, key income sources, and type of charitable expenditure.
Knowledge of the legal form of a charity, as determined by its governing document, provides a context for all other information provided about the charity. Disclosure of a charity’s legal form is also required by the Charities SORP. (11) Charities should always disclose this information.
We used information disclosed in the Annual Report to put each charity into an appropriate category of activity. (12) In most cases adequate information was available to do so easily. See annex A, table 3 for details.
It was relatively easy to allocate charities to an appropriate category based on their major sources of income and also by their type of expenditure because the standard of disclosure in the Statement of Financial Activities and supporting notes was generally good. (13)
Stakeholders’ ability to recognise a charity’s type from its Annual Report is a key part of transparency and accountability which charities of the size analysed ought to be doing well. While they were generally good at disclosing their activity and type of income and expenditure, there is room for improvement in these charities’ disclosure of their legal form.
There is no established method of categorising charities by activity within the sector, and that could cause difficulties for stakeholders who want to make meaningful comparisons between them. (14)
For all elements of transparency and accountability covered in our analysis, we broke down the findings to see whether there were any significant variations from the norm based on charity type. The results are set out in the relevant sections of this report.
As best practice, trustees should:
The provision of clearly accessible information about a charity’s inputs is essential to enable stakeholders to compare its inputs with outputs and thus assess whether it is using its resources effectively.
This chapter examines the clarity with which charities disclose input details and their inter-relationship with the charity’s aims, objectives, activities, performance and achievements, and future plans.
In this report the section on Organisational structure deals with disclosures concerning trustees.
On the whole, the charities analysed were good at reporting basic information on the number of staff they employ and the areas in which they are employed. That is required information in a note to the Accounts that has not changed for many years.
However, the Annual Reports did not generally contain much comment on staff numbers during the year or on major changes in the way staff are organised including deployment, training and how this contributes to organisational objectives. These details about staff are important so that stakeholders have a clear picture of how the charity is being run and how its resources are being spent.
The input of volunteers is often significant to the running of a charity. Volunteers carry out a range of activities including fundraising and administrative functions.
Charities are required to provide narrative about the effectiveness of volunteers in their Annual Report but are not required to place a value on their contribution in the Accounts. Without information on the extent to which volunteers contribute to a charity’s activities, stakeholders are unable to make meaningful judgements about its performance and efficiency. Where a charity makes significant use of volunteers in the course of undertaking its charitable or income generating activities this should be explained. Whilst measurement issues, including attributing an economic value to such unpaid voluntary contributions, prevents the inclusion of such contributions within the Statement of Financial Activities, it is nevertheless important for readers to be provided with sufficient information to understand the role and contribution of volunteers. Such information may, for example, explain the activities that volunteers help provide, quantify the contribution in terms of hours or staff equivalents, and may present an indicative value of this contribution.
The charities we analysed were generally good at meeting reporting requirements in relation to human resources but they could do more to provide the kind of extra information that gives stakeholders a complete picture of the contribution of the people involved in their work.
For the purposes of this analysis, property includes land, buildings and other tangible assets (such as computers and software, vehicles and fixtures and fittings) that are reflected in the financial statements and also other tangible and intangible assets that may or may not be reflected in the Accounts. (15)
There is no requirement to provide details of property in the Annual Report. However, without these details stakeholders cannot appreciate the full extent of the charity’s assets and the contribution they make to activities and the achievement of objectives. It is good practice to give this information in order to be fully accountable rather than merely compliant with statutory requirements.
The charities included in the analysis had total incoming resources for the year to 31 March 2003 of £7.2bn. We would expect a high standard of transparency and accountability from these charities to enable stakeholders to judge how effectively they have used these substantial resources.
The three main sources of income for the charities we analysed were:
The Accounts, if they comply with the Charities SORP, will tell the reader the charity’s major sources of income. However, many stakeholders will not be experienced in interpreting Accounts and will look to the trustees to explain in the Annual Report what the figures mean. An explanation of income and year on year changes is good practice that ensures all stakeholders understand the resources a charity has had at its disposal.
Some of the charities gave sparse commentary on financial matters, referring the reader instead to the attached Accounts. Others provided considerable commentary, explaining the major elements of the Accounts and the reasons for significant changes year on year.
The analysis also looked at the explanatory notes and comment to the Statement of Financial Activities (SoFA):
Comment in the Annual Report on the effectiveness of fundraising activities, when they are significant, is specifically required by the Charities SORP and is essential for stakeholders’ understanding of how a charity derives its income.
Our analysis found that:
The Annual Reviews did not generally provide any greater clarity in this area. Although 42% of Annual Reviews appeared to be designed to assist fundraising (Table 22), they mainly showed the use to which funds had been put rather than detailing the success (or otherwise) of fundraising efforts. For example, new fundraising initiatives may have high start-up costs that impact on fundraising performance.
Considering the interest and comment that this area of charities’ activities generates, this low level of detail in Annual Reports and Reviews is surprising. There is considerable scope for improvement here.
Most charities receive benefits for which they do not pay, or for which they pay at a substantially discounted rate. (16) The Charities SORP requires that, where this occurs and is quantifiable and measurable, it should be reflected in the Accounts either at cost to the donor or at a valuation made by the trustees.
Examples of this include where a charity receives free accommodation, has part of its administration services provided free by a commercial company or where staff are "lent" by a commercial company to the charity without charge. In all these cases the notes to the Accounts ought to at least recognise that these free services are being provided and, if it is impossible to put a value on them, to say so.
A number of charities’ financial statements indicated that there were no employees and no property costs. This is clearly not the case because the charity could not function without them. Where this information is missing, stakeholders cannot judge how effectively the charity is using its resources.
In a significant number of the Annual Reports and Accounts analysed, trustees did not refer to free or heavily discounted goods and services. This suggests they are unaware of the requirement to bring them into the Accounts if they are material and if the value is quantifiable and measurable.
Transparency in reporting demands that stakeholders can easily access information about all significant inputs to a charity. Where it is not a requirement that certain details are provided in the Annual Report, trustees should say where more information is available. The percentage of charities providing a good level of information about inputs in the areas covered in this analysis is disappointing and there is significant scope for improvement.
As best practice, trustees should:
Every charity exists to serve a specific purpose as set out in its governing document. To be registered as charitable, the purpose of an organisation must serve a public benefit. So information about a charity’s activities and achievements is a key element of its accountability to stakeholders. Without a clear idea of what a charity has achieved with its resources, stakeholders cannot see whether the charity is operating effectively and in the public benefit.
This chapter looks at the disclosures charities make to show what they have done during the year and, most importantly, what they have achieved and the benefits they have delivered.
The required disclosure in the Charities SORP is quite broad. It gives trustees flexibility in how they report on activities and achievements so that the specific circumstances of their charity can be reflected.
With regard to reporting on achievements, our analysis found that:
Particularly good at providing these details were the 12 International Activities charities (83% presented good detail), the 12 Religious charities (75%) and the 44 Social Services and Relief charities (75%).
The 39 charities whose main source of income was donations and legacies were better than average at explaining in their Annual Reports their outcomes and impact. 72% gave good explanation of what the charities had done to achieve their objects (overall average 65%) and 44% gave good detail on the benefit of the charities’ activities to their users (overall average 37%).
Our research showed that, while the Annual Report often gives minimal information about activity and achievements, the Annual Review tends to complete the picture:
Reporting on activities, and their impact and outcomes, is a key element of accountability. The Home Office response to the Strategy Unit report Private Action, Public Benefit included the following recommendation on the proposed new Standard Information Return (SIR) for larger charities (those with annual income over £1 million). The Home Office recommends that the SIR should:
"Highlight key qualitative and quantitative information about the charity, focusing on how it sets objectives and measures outcomes against these."
Transparency demands that stakeholders can readily access information about a charity’s activities and achievements. It is therefore encouraging that so many charities provide details of the year’s activities in their Annual Report, although there is room for improvement among the 15% that provided little or no detail.
Information about activities in the Annual Review should not be used as a substitute for a basic level of accountability in the Annual Report. In addition to summarising the key results, it is good practice for the Annual Report to refer readers to where more information can be found. In our analysis, where the Annual Review did provide more information in this area, only 24% of Annual Reports gave a cross-reference to the relevant material.
The three main types of charitable expenditure for the charities analysed were:
Most charities provided good notes to the Accounts to explain all their major sources of expenditure, although one or more explanatory notes were missing for 75 of the charities (38%).
We examined comment in the Annual Reports about unusual financial items such as a large deficit in a defined benefit pension scheme, large reorganisation costs and/or redundancy costs, or large one-off charitable expenditure. Of the 148 charities appearing to have such items:
By contrast, a much higher proportion of Annual Reviews gave information on financial matters:
The charities in the survey had total outgoing resources for the year to 31 March 2003 of £7bn. It is extremely important that trustees are accountable for how that money is spent.
The impact of a charity’s activities is of great interest to stakeholders as a measure of its effectiveness in applying its resources for public benefit.
Analysis of the survey results by type of charity activity shows that:
Charity trustees need to regularly reassess how the activities of the charity impact on society and provide a public benefit. Anecdotal evidence suggests that more and more charities are starting to study this aspect of their work as a matter of routine and we would encourage this trend along with reporting on the issue in the Annual Report. Reporting on the impact of a charity’s activities is not a Charities SORP requirement but it is a key part of best practice in transparency and accountability to which charities should be giving greater attention. Failure to comment on impact does not mean that trustees do not consider it, but may leave stakeholders with that impression.
One charity we reviewed produced a detailed and informative "Impact Report" as part of its Annual Report and Accounts. This elaborated on the charity's strategic aims, translating them into impact measures and targets that stakeholders could then use when looking at its performance over the last year.
Most charities set themselves targets for the year which may be related to finance or to activities. Monitoring achievements against these targets and reporting on progress is an important aspect of accountability that enables interested parties to judge how well the charity is doing.
There was one significant variation from these findings. Only one Culture, Sports and Recreation charity out of 20 gave good detail on how its achievements compared to plans.
We appreciate that the last year or two have been very difficult in the investment markets, but this does not justify reducing the level of transparency and accountability by failing to give a statement of policy and a statement of performance against it.
Reporting on performance against reserves policy targets is not a Charities SORP requirement but it is an important area of transparency and one in which there is room for improvement. The Annual Report can provide an overview with the details elsewhere; cross-referencing to sources of further information is good practice.
The Charities SORP requires that charities comment on the activities and achievements of their subsidiary companies. A significant number of charities’ Annual Reports did not do so.
The accountability of trustees applies to all parts of the charity; failure to report on the activities of a subsidiary means that stakeholders are not informed about a potentially significant aspect of the charity’s activities.
As best practice, trustees should:
A charity that was selected for a review visit did not make much information to the public available about its aims and activities. This gave the impression that the charity might not be operating effectively.
During the visit it became clear that the charity was a very active and dynamic organisation and had simply failed to communicate this to its stakeholders, including the Charity Commission.
Charity Commission staff advised the trustees to make the rationale of the charity, how it operates and its success stories available via its Annual Report, on its website and in other documents so that the public could form a greater understanding of its work.
In this instance the work of a well-run charity was undermined by its failure to be fully accountably to its stakeholders.
Our review visits programme consistently identifies a number of charities which have demonstrated good levels of transparency in many ways, such as a detailed and informative Chair's Report, but which fail to comply with some of the basic Charities SORP requirements.
Trustees should provide in their Annual Report details on the benefit to society of the charity’s activities and achievements. Demonstrating the public benefit provided by the charity is a key area of accountability.
The robustness of management structures and significant internal processes of charities is vital to the effective delivery of their services. A key element of transparency and accountability is the ability of stakeholders to find out from the Annual Report and Accounts who the trustees are, how they have organised the charity and the key processes they use to run it. This chapter reviews the levels of disclosure by charities on these structures and processes.
The Charities SORP requires that trustees provide "a description of the organisational structure of the charity and how decisions are made".
The Charities SORP requires each charity to state in the Annual Report the names of the trustees at the time the report was signed and throughout the financial year covered by the Annual Report. It also requires disclosure of other details relating to trustees, principally concerning the method of appointing them and who makes the appointment.
The trustees of a charitable company are appointed by its members. In some instances the members and the trustees may be the same people. To aid transparency, the Annual Report should provide complete clarity and full details on how the trustees are appointed.
Many boards of trustees, particularly of larger charities, delegate some of their functions to committees. This can be a positive way of working: it allows more time to be devoted to matters delegated to the committee and enables non-trustees to be involved, thus broadening the spread of relevant expertise to help in decision-making.
Stakeholders should be able to ascertain which decisions are delegated and to whom so that they can tell how decisions are made.
As a general rule, trustees may not be remunerated unless their governing document gives the power to do so or unless the prior permission of the Charity Commission has been obtained. The Charities SORP requires the remuneration paid to trustees to be disclosed and nature and amount of expenses reimbursed to trustees to be set out in the notes to the Accounts.
There is also a requirement to confirm that trustees have not been remunerated or that no expenses have been reimbursed.
Inadequate information in these areas means that stakeholders do not know who is ultimately accountable for the charity’s activities. This is a key area of transparency so the figure of 22% that provide no information about the appointment of trustees is not acceptable.
It is good to see that the majority of charities provide the required information about remuneration. We would like to see more charities going beyond the bare minimum requirements to provide complete clarity on trustee expenses and remuneration.
To judge the soundness of a charity’s organisation, stakeholders need to see details of its structure (activities, divisions and departments) and of the chief executive and senior executives in charge of running each activity/department/division. Stakeholders need this information to assess, for example whether a charity is run effectively or bureaucratically.
A subsidiary company’s performance is often a major factor in the whole charity’s performance. Trustees are responsible for the operation of the whole group of organisations, so the Annual Report should:
The Charities SORP, Financial Reporting Standards (and the Companies Act, where relevant) require brief information concerning the subsidiaries to be disclosed in the Accounts. However, the Charities SORP calls for the Annual Report to comment on the subsidiaries’ activities during the year. 76 (38%) of the charities analysed had a main source of income from trading, which is usually through subsidiaries. 140 of the 200 charities analysed had subsidiary or associated companies.
Charities often work in partnership with other charities and other types of organisation to deliver their charitable activity. These other charities and bodies may fall into the category of related parties (as defined in the Charities SORP and in Financial Reporting Standard 8). Transparency in describing a charity’s structure dictates that the trustees should report on all major partnerships and arrangements with other organisations – not just the financial aspects but their rationale, activities and achievements that help the charity to further its objects. We found that:
Details of risk management are important aspects of transparency and accountability. Stakeholders should be able to ascertain from the Annual Report that all elements of risk in the charity have been identified and minimised.
The Charities SORP requires trustees to make a statement in their Annual Report about risk. Many charities meet this requirement but give the impression that they do so because they have to, instead of showing they have gone through a thorough process to support their statement.
Charities increasingly depend on IT, so they face major risks if it does not perform effectively. Accountability to stakeholders is enhanced if details of the charity’s major IT systems are provided.
Analysing the findings by the different categories of charity showed that Housing and Community Affairs charities gave much better than average additional disclosures on risk management. 65% of them gave good detail on how major risks are monitored and controlled (overall average 47%). This is likely to be because 16 of the 28 charities in this category are Registered Social Landlords, which are required to make a much more detailed statement on internal control by the RSL SORP than is required by the Charities SORP.
We found that the extent of comment on organisational structure, particularly on subsidiary and related organisations, was inadequate. There is considerable room for improvement to provide stakeholders with complete clarity about how these charities operate.
As best practice, trustees should:
The Annual Report should show clearly how charitable objects are translated into actions. The charity’s legal objects are normally expressed in very broad terms and it is not usually possible for trustees to address the whole range of activity permitted by them. A major element of the trustees’ responsibility is to decide what specific activities the charity will carry out and the resources available for them.
This chapter focuses on disclosures by charities of their strategies, policies and plans to help deliver their charitable objects.
A key element of accountability to a charity’s stakeholders is the provision of information about the charity’s strategy which encapsulates the specific areas of activity that the charity is focusing on within the parameters of its objects.
The Charities SORP does not explicitly call for details of a charity’s strategy to be disclosed in the Annual Report; it requires disclosure of details of activities in the year in the context of the strategy. However, many charities include in their Annual Report details of the current strategy or mission statement (or both), including an assessment of how far their activities have met their aims.
The Charities SORP does require that the Annual Report includes comment on the plans for the charity’s future. Trustees often take this a step further and include comments in the Annual Report on the financial health of the charity.
A partial explanation for any omissions is that these are the kinds of detail that charities prefer to disclose in Annual Reviews.
More Social Services and Relief charities, and Religious charities, provided good details about future plans in their Annual Reports (50% and 42% respectively) than the average of 33%. Only 8% of Education, Training and Scientific Research charities provided good details about future plans in their Annual Reports but this was compensated for by a higher than average figure for disclosures in their Annual Reviews (89%).
A statement of a charity’s plans is important so that stakeholders can see how the charity will continue to function. Too many of the charities analysed failed to provide this information and therefore failed to comply with the Charities SORP and to provide complete transparency for stakeholders about the position of the charity. It is good practice to provide further details in the Annual Review but not to use the Annual Review to substitute for information that is required in the Annual Report. Where the Annual review does provide additional information the Annual Report should contain suitable cross-referencing.
Trustees determine the key policies that the charity will follow to achieve its aims. Disclosure of this information in the Annual Report strengthens the charity’s accountability to stakeholders by showing them how the trustees plan to raise and use resources.
42% of Housing and Community Affairs charities gave good detail on their reserves policies – 24% less than the average figure for all 200 charities in the survey.
Those charities that did not mention a policy at all are in breach of the Charities SORP and, if they are not limited companies, of the requirements of The Charities (Reports and Accounts) Regulations 2000.
The charities included in the analysis had total reserves at 31 March 2003 (excluding endowment funds) of £5.9bn and "free reserves" of £0.9bn. This is a significant sum for which the charities should be fully accountable. It is not acceptable for any of the charities in the analysis to fail to provide details of their reserves policy. We would encourage more charities to follow the example of the 38% that gave full details of their policy and their performance against it.
Charity Commission publications Charity Reserves (RS3) and Charities Reserves (CC19) give more information on reserves and are designed to improve the quality of reporting in this area.
Where applicable a charity is required by the Charities SORP to state its powers of investment in the Annual Report.
Such a high level of failure in Charities SORP compliance is not acceptable in charities of this size which could potentially hold significant resources in investments.
Where applicable a charity is required by the Charities SORP to state its grant-making policy in its Annual Report. Trustees should provide more than a minimal statement in this area, especially where grant-making is a significant part of the charity’s expenditure. Full details of a charity’s grant-making policy give stakeholders a clear understanding of where the charity is spending its money and how those decisions are made.
It is disappointing that 66% of grant-making charities give no details of their grant making policy. It is a Charities SORP requirement that grant-making policies are disclosed and it is also a key element of transparency and accountability. 40 charities had grant making as their main source of expenditure, 12 of which (30%) failed to give any details of their grant-making policy in their Annual Report and Accounts.
Both the Annual Review and website of these charities (if applicable) were studied to see if they contained additional information. (18)
Additional information provided ranged from a detailed breakdown of grants awarded and the grant-making policy to more general facts and figures. Two of the charities gave good or excellent details on their grant-making policy. Five gave a few details on their programme and the remaining five gave no details at all. The information was mainly presented as tables or graphs.
Only three of the 12 charities cross-referred from their Annual Report to the Annual Review or the website, a figure which was consistent with the whole sample group of 200.
The 40 charities whose main expenditure was grants should be much better at accounting for how they have distributed this money. As grant making is the main focus of their operations, they are not being accountable or transparent unless they explain their policy to stakeholders.
The Charities SORP, Financial Reporting Standards, the Charities Act and Regulations and the Companies Act all require disclosure of a charity’s accounting policies. The Annual Report should demonstrate to stakeholders that the trustees have reviewed their charity’s accounting policies to ensure they are still the most appropriate and reflect the charity’s current circumstances and most recent external requirements. (19)
Disclosure of accounting policies for major balance-sheet items caused few problems. Omissions tended to occur in the SoFA. Trustees should take particular care that a policy is stated for the allocation of costs between the categories of expenditure in the SoFA.
Housing and Community Affairs charities were not good at disclosing these powers and policies (14% and 18% respectively), nor were Health and Medical charities (14% and 29% respectively). International Affairs charities were better, at 25% and 50% respectively, and Religious charities were well above average at 33% and 67% respectively.
Disclosure of accounting policies is a key part of transparency and accountability. Financial information about a charity is essential for stakeholders to whom the trustees are responsible for safeguarding the charity’s assets and spending its resources. There is room for improvement in this area. While it is encouraging that some charities are providing information about changes to accounting policies, we would not expect to see a quarter of charities of this size with statutory information missing from their Annual Report.
As best practice, trustees should:
Illustrative examples of best practice include:
The Annual Report of one grant-making charity gave a full list of its grants, with a detailed explanation of the purpose of each and background information to each decision.
The Annual Report also gave guidance on applying to the charity for assistance, showing further the trustees' understanding of the document’s public character.
Another charity whose reserves policy was clearly set out helpfully explained the calculation used.
1. Strategy Unit, Private Action, Public Benefit – a review of Charities and the wider not-for profit sector, Cabinet Office, 2002.
2. A series of key financial ratios were also examined and these will provide the focus of a second report to be published later this year.
3. Details of the survey methodology can be found in annex A
5. Annual reviews are defined in annex B
6. The legal obligation to complete an Annual Report comes from Regulation 7(4) of the Charities (Accounts and Reports)Regulations 2000, these underpin the matters set out in SORP.
7. Stakeholders may include: beneficiaries, donors and funders, volunteers, staff, interest groups, central, regional and local government (as a funder or as a policy maker), partners or suppliers, the media and the public.
8. Filing obligation Charities Act 1993, section 45. Charities can choose the date for their financial year end.
9. See table 2, Annex A for details of which SORP was applicable to the charities analysed.
10. The charities in this analysis were sufficiently large to require an annual audit of their Accounts. The auditors are only legally required to express an opinion on the Accounts, although their professional rules also require them to be satisfied that nothing in the Annual Report, and other statements published with the Accounts, conflicts with information disclosed in the Accounts.
11. The five main types of charity are – limited companies (usually limited by guarantee), unincorporated charities (trusts or associations), charities incorporated by Royal Charter and charities incorporated under an Act of Parliament. Their governing documents are, respectively, the Memorandum and Articles of Association, the Trust Deed or constitution, the Royal Charter or the Act.
12. The categories used are those set out in the Caritas Data Top 3000.
13. The categories of income used in this analysis were mainly derived from the Charities SORP. The categories of expenditure were derived from the classifications used on the Charity Commission's Annual Return.
14. For example, a charity that provides physical assets to beneficiaries (which would put it in one category) may do so for a purpose that falls into another category – a charity providing housing to a particular class of beneficiary could fall into either "Housing and Community affairs" or "Social Services and Relief".
15. For example, historic or inalienable assets that have not been capitalised, patents, licences and trademarks, the charity’s name and / or logo.
16. This section excludes the contribution of volunteers as dealt with earlier.
17. The Charity Finance Directors' Group produced a discussion document in 2003 ("Inputs matter – Improving the quality of reporting in the charity sector") that suggested that the time devoted to the charity by volunteers should be included in the Accounts, valued at a standard rate.
18. 3 of the charities did not have a website or produce an Annual Review.
19. The findings of our analysis echo those of the Charity Finance Directors’ Group, which states in its report "Inputs matter – improving the quality of reporting in the charity sector":
"There needs to be more clear and full disclosure by charities of accounting policies, estimation techniques and bases of allocation/apportionment of costs, especially central costs, across the lines of the Statement of Financial Activities."