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ICAEW guide dispels popular charity sector misconceptions

Author: ICAEW Insights

Published: 13 Jul 2023

New ICAEW guidance explodes common myths about charities and offers tips to help build confidence in the charity sector.

From concerns that they spend too much on fundraising and on the salaries of highly paid executives, to confusion around their tax status and a belief that they should not engage in campaigning and political activity – misconceptions about the charity sector are rife. 

But a new ICAEW guide published today is setting out to set the record straight. ‘Dispelling common myths about charities’ explodes some of the most prevalent misunderstandings about the third sector and offers practical recommendations to help dispel them so public and donor confidence in the sector can continue to build.

The guide touches on how charities are run, carry out their work, are funded and staffed, whether they are liable for tax and their vulnerability to fraud, among other issues. 

The working group that coordinated the guide includes charity practitioners from BDO, Crowe and RSM. It was chaired by Pesh Framjee, who has led several not-for-profit teams within accountancy firms. Framjee says: “There are many negative misconceptions created by the myths that abound about charities. 

“As someone who has worked with and for charities for more than 35 years, I too often see the negative consequences that impact on charities. It is incumbent on all of us who recognise the important work that charities do to actively try and dispel these myths and ensure that the popular narrative focuses on the facts and reality.”

Despite a broadly positive perception of the charity sector by the general public, research conducted on behalf of the Charity Commission published in July last year highlights a stubbornly persistent scepticism regarding how charities use their money and how they behave. 

In a recent blog, Neil Heslop, CEO of the Charities Aid Foundation, warned of an ongoing decline in the number of people giving to charity for the past five years, which has now been exacerbated by the cost-of-living crisis. 

The ICAEW guide explains why it is important for a range of stakeholders, including donors, to understand not only what charities do, but to shine a light on how they operate, the need for a professional approach, and the funding of core activities. 

Kristina Kopic, ICAEW Head of Charity and Voluntary Sector, ICAEW, explains: “People’s goodwill and generosity remain the lifeblood of the sector, but this is at risk if the public misunderstand what charities do and how they operate. We hope that by tackling the 10 most common myths about how the voluntary sector operates, we will encourage charity trustees, staff and advisers to be transparent in areas where misconceptions are prevalent.” 

The guidance considers the following 10 myths surrounding charities and their operations:

  1. Charities spend too much on fundraising.
  2. They should not make a surplus or build up cash reserves.
  3. Too much is spent on highly paid executives.
  4. They should not undertake commercial activities.
  5. Charities should be run and staffed [for free] by volunteers.
  6. Too much is spent on overheads.
  7. Charities don’t pay taxes, so need less money.
  8. Professional qualifications are needed to become a charity trustee.
  9. Charities are less vulnerable to fraud than other organisations.
  10. Charities should not engage in campaigning and political activity.

In response to the myth that charities spend too much on fundraising, Nick Sladden, Head of Charities at RSM and contributor to the guide, says: “Some donors don’t like to see charities spending money on fundraising. However, directing money to effective fundraising can dramatically generate greater sums of money. 

“There are many examples proving that fundraising income of five times can be generated from an original donation, which can then go to serve the charitable cause. It’s a myth that we shouldn’t be encouraging charities to spend effectively on fundraising, which our publication hopes to address,” he adds. 

Refuting charity myths: too much money spent on overheads

The notion that charities spend too much on overheads has been a long-running theme for those looking to evaluate or criticise a charity. Naziar Hashemi, National Head of Social Purpose and Non Profit Organisations at Crowe, contributed to the guide and argues: “We need to change the assumption that overhead costs are a bad thing and cast away the spurious benchmarks that suggest the effectiveness of an organisation is based on how much it spends on its overheads.” 

The guide warns that when charities don’t invest enough in their infrastructure, it can negatively impact their ability to achieve its long-term objectives. According to Hashemi, this thinking can drive the wrong decisions in investing for the future, or indeed starve a charity of the required funds so it ends up living hand to mouth.

Most charities DO need cash reserves

Charities reporting surpluses or cash reserves can attract critical but often flawed headlines over whether their assets are being managed in the charity’s best interests. In most cases, charities need to hold a reasonable amount of funds in reserve.

Fiona Condron, Audit Partner, Not for Profit at BDO and a member of the guide’s working group, explains: “The financial challenges faced by many organisations over the past three years have shown that charities also need to have robust finances, including reserves, to weather the ups and downs.” Charities should articulate their plans to retain or spend funds clearly so that stakeholders can understand why those reserves are held, she says.

According to Kopic, donors want to know that the charity they support financially is sustainable and accomplishing its mission. “Charities are value-led organisations that care deeply about the causes they serve, but they must operate professionally, or they might not survive. In helping to put these common myths to bed once and for all, charities can focus on delivering their important work and reaching their strategic aims.”

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If you are a finance professional with involvement in the charity and voluntary sector, why not join ICAEW's Charity Community to stay up to date with the latest developments in charity finance, taxation and governance.

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