In light of some recent controversies in the not-for-profit sector, John O’Callaghan considers the challenge facing auditors.
Trust in Ireland’s not-for-profit sector has taken something of a hit in recent times with a number of high-profile organisations feeling the brunt of public disquiet and acrimony. Issues around corporate governance and accountability have, invariably, been at the heart of these controversies; concerns that will always be ‘hot button’ topics in a sector where funding comes from personal donations and individual membership fees.
An evolving regulatory framework, shaped largely by the Charities Act 2009 and the Companies Act 2014, has brought some long-overdue certainty to governance within the sector. However, for all the talk of emerging best practice, charitable and membership bodies continue to be over-represented in terms of corporate lapses, with no guarantee that more of the same can be avoided in the future.
Not-for-profit covers a wide spectrum of activities and includes organisations with deep roots in Irish society, from charities and educational bodies to trade unions and member organisations. The knock-on effects of controversy in any individual organisation can be hugely significant – charities can experience significant fall-offs in donations, reducing their capacity to deliver on their goals, while member organisations can find their effectiveness diminished as their credibility is tarnished.
Concerns and responsibilities
As finance invariably plays a central role in governance controversies, it behoves accountants to take a considered look at the controls, reporting mechanisms and risk management systems operating within the sector and to ask if there is anything the profession could do differently to mitigate public concerns. Worth reiterating is the fact that few, if any, recent controversies have related to outright fraud or misappropriation.
Most have, instead, centred on what are seen to be excessive remuneration packages or the allocation of charitable donations towards pension and pay, as opposed to the charity’s goals, alongside public disquiet on a lack of transparency in this regard.
In their role as auditors, accountants are given the responsibility of assessing an organisation’s risk management, governance and internal control structures. Holding such a privileged position, it is reasonable to ask just what they could do in terms of addressing these controversies and/or how they could challenge organisations to reform before any such controversy erupts. Where controversy flares over the salaries of senior staff or a lack of transparency around its disclosure, is it reasonable to respond that this is a question for executive boards rather than auditors?
There is no simple or straightforward answer to this. As a starting point, however, we would do well to remember just how poorly the ‘it wasn’t in the audit remit’ argument was received in the aftermath of the financial collapse of 2008 and the battering the profession’s reputation took as a result.
Reputational risk cuts both ways and the public has shown itself to be particularly unforgiving to what it perceives as the failings of watchdogs.
Culture of improvement
The starting point of any positive response should instead be to recognise that the role of audit is to evaluate risk from a number of perspectives. Any audit process in the not-for-profit sector should also begin by recognising that an organisation funded through the money of other people has a particular responsibility to show that this income is being used wisely.
An audit strategy should, therefore, delineate the range of trust and reputational risks that a not-for-profit body faces, in addition to the normal organisational ones. How a charity remunerates its employees, ensures the transparency of its finances, and mitigates against fraud and corruption, for example, are likely to be intrinsic to its reputation and, therefore, its future viability.
The auditor cannot hope to provide answers to all these questions, but they can set out to identify where weaknesses exist and invite adequate responses to them. In this regard, their role can also be seen in terms of championing and supporting a culture of improvement and inculcating best practice within the organisation. The relationship with the executive board and audit committee will be pivotal to an auditor’s success in this regard. An effective auditor should set themselves the goal of challenging board assumptions, and raising concerns with the board and audit committee about the management of risk in the organisation.
FRS102: the sector’s Reporting benchmark
The Statement of Recommended Practice, Accounting and Reporting by Charities (SORP) was first introduced in the UK in 2005. Charities SORP (FRS102) accommodates the recent FRS 102 standard and should be considered the benchmark for any not-for-profit body in Ireland in terms of accounting and reporting requirements.
SORP (FRS102) has a number of requirements that, if adopted, would help address many of questions that have concerned the public in recent years. It provides for greater clarity on what is an absolute disclosure requirement and what is considered to be a ‘good to have’. It also brings reporting in the sector closer to that of corporate level, with broader risk disclosures and greater focus on fairness and balance in the trustee’s report.
Charities SORP (FRS102) also recommends the disclosure of executive pay scales within particular bands – a development that, if implemented across the Irish not-for-profit sector, would go a long way to meeting some longstanding demands for transparency.
Challenge and opportunity
In 2015, BDO hosted an invite-only in-camera lunch with CEOs from some of Ireland’s leading not-for-profit organisations. Reputational risk and the emerging culture of change within the sector were natural discussion points. However, the event also served to illustrate the fact that, while there is certainly far greater awareness around what best practice looks like and a willingness at board level to engage with it, there was far less confidence that the kind of structural change that should follow within organisations was actually taking place.
For auditors, this must be seen as a concern but also an opportunity to show leadership. In the context of recent controversies, the positive is that guidance around best practice is being sought and embraced at board level. Auditors can provide this support while recognising that the proof of the pudding will be seen in the level of clarity and transparency that is provided in terms of actual financial disclosure. The time and space given to an organisation’s finances within its annual report, for example, can be seen as indicative of the true tempo of change within an organisation and a sign, indeed, of whether an auditor should have ongoing concerns.
Charitable bodies and membership organisations can experience significant and long-lasting damage to their reputations when their credibility is undermined. The role of an auditor in assessing whether internal controls are fit for purpose has, arguably, never been more important. Knowledge and experience of the sector lie at the heart of an auditor’s ability to effectively diagnose where risks and challenges lie, and to assess whether an organisation is pursuing a corrective course.
An auditor cannot provide all the answers but unless they are asking the right questions, their presence in a not-for-profit organisation may be doing it, and their own reputation, more harm than good.
John O’Callaghan is Partner and Head of Not-For-Profit Sector team at BDO Ireland.