2020/21 Reporting Season: charity reporting – can viability be based on 2020’s performance?
10 December 2020: “You cannot really base a charity’s future on 2020 because it will not necessarily be anything like what we have just experienced,” says Joanna Pittman, Partner in Sayer Vincent.
It is fair to say that the charity sector has endured a highly turbulent 2020. In some cases, there has been an onslaught of activity. In others there has been a massive decline. In many cases, funding has been a huge issue. For some charities, there has been a challenge to their very existence. And there are still no signs things will stabilise any time soon.
“The charity sector is so varied,” says Pittman. “And their activities and their funding are not connected.”
She continues: “Whereas, in a commercial entity, the funding and the activity are very much linked – so if one goes down the other will go down – with charities it can be completely the other way around. For some of my clients, their activities are going up because the need for what they do has increased, while the funding may have disappeared. But that is not the case across the board.”
The outcome of the events of 2020 depend on many criteria, points out Pittman. “There is a matrix,” she says. “How secure is their income in relation to the going concern question? How fixed or flexible is their cost base? And then what, to them, is strategically important? It all depends on where the charity is on those three different spectrums.”
In terms of looking ahead, what questions should auditors and trustees ask themselves? Pittman responds: “What’s their business model? Where does their funding come from and how secure is it? What are their costs, how fixed are they and can they scale down as necessary?”
She continues: “With going concern – and with charities in particular – we are not necessarily thinking that they can plough on full steam ahead at the rate they have in the past. For some of them it will be: can we just scale down enough to keep the lights on? For others, they can carry on as normal.”
Looking forward, all we know is that there will probably be some sort of lockdown in early 2021 and then there may be an economic fallout from either Brexit or the pandemic or both. “All we can do as auditors is to see whether charities have the reserves to see them through an uncertain period,” she says. “Charities are encouraged to save for a rainy day and, for some, that rainy day is here.”
Planning around reserves should be risk-based, she says. “It shouldn’t be about the number of months’ expenditure necessarily. It should be what are the risks, where might income be uncertain, and for what do we need to set reserves aside in case that income does not materialise,” she says. “And how are these reserves held – is it in cash, investments, property?”
A further challenge for charities is that the people running them and making decisions are ultimately trustees. “The people who approve the accounts and have to make these decisions on whether they are a going concern – looking ahead for a year and saying whether they can continue operating – are volunteers. They are not paid to do that,” says Pittman.
“They may not be finance professionals. They may not understand going concern,” she says. “For them, it’s really important that we, as the auditor, explain by what we mean as a going concern. We say to boards, can you look ahead a year and be confident there are no material uncertainties in the year ahead that would stop you operating?”
The one thing we do know is that there is uncertainty, and boards will say as much. “We then have to explain that, although there are uncertainties, are there any that are significant enough to stop you operating? What would happen if you don’t have a plan B or plan C to get you through?”
While trustees are unlikely to have intimate knowledge of the running of a charity, most charities we work with have a paid management team. “That relationship between the management and the board is really important,” she says. “We need to get across to them why it is OK to go ahead and forecast with some certainty that they’ve got things covered.”
If the board requires the management to restructure and cut costs to achieve a certain level of comfort, then that is likely to happen. And let’s not forget that trustees can be found personally liable for breach of trust in certain circumstances.
In keeping with auditors generally, Pittman and her team have undertaken remote audits, negotiated the various methods of both paper and digital record-keeping without face-to-face meetings, dealt with stock-takes and absorbed the pressures of pandemic.
“In terms of the human element, I’m most concerned about my own team. Particularly my ACA students,” she says. “We have about 30 students training with us. Another 10 will start in the new year. What will their experience be? And what will they miss? What won’t they hear? I’m not sure you can replicate the real audit experience remotely.”
Finally, a key element of what a charity does is to have impact. “Whatever your charity’s activities, you have to explain your impact,” says Pittman. “A charity is required to tell a story. How did it change beneficiaries’ lives? The trustees’ report is a key part of reporting.” Even that is going to be difficult for many.
Joanna Pittman is a partner at Sayer Vincent, a charity-specialist audit firm. She is a member of the Charities SORP Committee and chairs the ICAEW Charity Committee.