Charity accounting needs radical overhaul, says Morgan review

Charity reporting and accounting needs to be overhauled to provide more transparency and accountability on financials and to simplify the reporting process for the smallest charities, says Charity SORP review panel, chaired by professor Gareth Morgan

The independent review was instigated following criticism of the members of the Charity SORP committee, who are responsible for writing the accounting rules for the charity sector - the Charities SORP (Statement of Recommended Practice), which sets out the financial reporting requirements that apply to almost all charities preparing accounts designed to give a true and fair view.  

The nine-month investigation, chaired by professor Gareth Morgan, an academic and charity practitioner, conducted a complete governance review of the constitution and composition of the Charities SORP committee and the SORP making process, and has now called for a radical overhaul of the current standard-settting process. The investigation was supported by the four charity regulators in the UK and Republic of Ireland.

One of the main criticisms was the committee's slowness to reflect wider changes to FRS 102 accounting rules, as well as failing to strengthen the weak controls over anti money laundering and crossborder financial oversight of charities. There were also concerns about the over complexity of reporting for smaller charities and a lack of public confidence in the overall charity sector following the collapse of Cup Trust and Kids Company following financial misconduct, generally reducing public trust in the charity sector.

The Morgan review has set out five key recommendations designed to ensure that the way charities report on their work and account for their income under the Charities SORP can meet public expectations and improve accountability and transparency of charity accounting.

A Charity Commission spokesperson told Accountancy Daily: ‘The report is to the SORP-making body and so will not be presented to government as our sponsoring department, DCMS, has no role in the SORP-making body.

The report makes a number of recommendations to reform the SORP development process including changes to the composition of the Charities SORP Committee and it will be for the SORP-making body to now look at how best to put these into effect.

‘Some initial changes have already occurred with a new section of the SORP site explaining about the SORP-making body.’

While there is no fixed timeline for implementing the recommendations, there is pressure on the regulators to move quickly as the current SORP needs urgent attention following the last FRS 102 Triennial Review by the UK accounting standard setter, the Financial Reporting Council (FRC), which made a number of significant changes to UK GAAP.

Reponses to the Morgan review highlighted the tensions between large and smaller charities as entities required to apply the SORP, issues between the regulatory frameworks in the four jurisdictions – England, Scotland, Wales and Northern Ireland, and between the very different types of organisations in the charity sector which are all subject to the SORP, including grant-makers, faith-based organisations, charities delivering public services, membership bodies and many other categories.

There was also conflict over the role of the SORP and its interaction with FRS 102, the main UK GAAP accounting standard, and the charity regulators’ need to use the SORP to monitor the accountability of charities.

Professor Morgan said: ‘If the SORP is to succeed for another quarter century it has to move on to meet new expectations regarding the accountability of charities for their plans and their use of financial resources.

‘The resulting financial statements must be meaningful for those who use them. And the SORP must remain usable for those preparing charity accounts – there will always be some complaints, but it must be possible for the vast majority of charities subject to the SORP, whether larger or smaller, to apply it effectively when preparing their annual reports and accounts each year without disproportionate costs or effort.’

The main reform recommendations include:

•             refocusing the SORP and greater simplification of reporting requirements for smaller charities;

•             the SORP Committee should be retained but reforms are needed regarding size, composition and clarification of the respective roles of the SORP-making body and SORP Committee;

•             broader and ongoing engagement is needed with a much wider group of stakeholders if the SORP is to continue to be fit for purpose;

•             the charity sector and regulators should collaborate to identify and codify best practice in non-statutory financial reporting;

•             the SORP-making body, supported by the FRC, needs to ensure that the redesigned SORP development process takes effect; and

•             increased funding to ensure the SORP process is adequately resourced to implement these recommendations.

Morgan, said: ‘As an academic and a charity practitioner, I am aware of the strengths of the Charities SORP but I have also been aware of concerns expressed by some. Our consultation led to a wide range of really constructive suggestions, and I am confident that if the panel’s recommendations are implemented the SORP will be considerably more effective in future.’

The governance review was undertaken by an oversight panel comprising a representative from each of the four charity regulators and an observer representative nominated by the Financial Reporting Council (FRC). The work of the panel was overseen by professor Gareth Morgan, an independent chair retained by the SORP-making body.

As yet, the charity regulators have not responded to the Morgan review.

The governance review was undertaken during 2018 and early 2019, and included a public consultation and a number of stakeholder events. The 36 recommendations will now be submitted to the charity regulators for consideration and response.

Sara White

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