Accountants – the fiduciaries advising and guiding non-profits through the crisis

• According to the Northern Ireland Council for Voluntary Action (NICVA), as of February 2020 there were approximately 6,122 non-profits with total income of £792m in Northern Ireland.
• In the Republic of Ireland, according to data available at the end of 2019 collated by Benefacts, there were approximately 32,841 non-profits. The total income determinable for 32% of these was €14.2bn (the remaining 68% being mostly smaller local non-profits for which relevant information was not publicly available).

Impact of Covid-19 pandemic on the sector

The financial impact of the Covid-19 pandemic on non-profits is not yet clear. Many non-profits entered 2020 with low reserves and some have been forced by the pandemic to pause operations, while others have experienced a surge in demand for their services. Accountants are playing an important role in supporting the recovery of this sector, such as assisting with obtaining grants and government supports.

In a report published by Benefacts in May 2021, ‘Charities in Ireland 2021’, an uplift of over 10% in government funding was provided to charities in the Republic of Ireland. Some charities also benefited from increases in philanthropic donations.

Five key considerations for accountants providing services to the non-profit sector

Given the level of commitment of members in practice to the non-profit sector, the following considerations are a useful aide memoir for some of the common matters that can arise:

1. Determine if client is a charity or other non-profit

All charities are non-profits but not all non-profits are charities. For example: an owners’ (or residents’) management company may establish as trading for the mutual benefit of its members, but it is not a charity, nor is it a non-profit established for a public benefit; and while a sporting organisation may be established as a non-profit, it may also be registered as a charity. If in doubt, confirm by reference to the registers of charities maintained by the Charities Regulator in the Republic of Ireland or the Charity Commission of Northern Ireland if the non-profit is a registered charity.

When accepting a non-profit client, it is important to understand these nuances to determine the type of services you may be requested to undertake and also to understand its various governance structures that may impact on anti-money laundering vetting and other client acceptance procedures.

2. Avoid a principal-agent dilemma

Many non-profit organisations are juggling various governance, secretarial, accounting, audit, and finance requirements, in the midst of delivering services. While some of the larger non-profits will have full time staff to manage these requirements, smaller organisations will have fewer resources (sometimes consisting of part time or volunteer staff).

The board of trustees/directors bears the ultimate responsibility for the management and control of the organisation, but there is a level of reliance placed on the services of the accountant to fill any gaps in expertise.

A principal-agent dilemma can arise in instances where the principal (the non-profit) can have different expectations to those understood by the agent (the accounting firm). This dilemma is more common in casual and informal business relationships, potentially exposing the fiduciary (the accountant) to greater risk. Where the accountant accepts appointment as auditor, they are a principal in their own right. Auditors need in the first instance to maintain their independence, and all additional services should be viewed in this context. Part of the solution is to ensure that a tailored engagement letter is put in place at the start of each business relationship, clearly stating services to be provided and each party’s responsibilities. The letter should be reviewed annually and updated when required.

3. Advising on governance requirements for charities

Charities in the Republic of Ireland are required to apply the Charities Governance Code (the ‘Code’). In 2021, charities are required to report for the first time on compliance with the Code. The following key points address some common queries from charities:

• Charities are required to note in their annual return to the Charities Regulator whether they are compliant with the Code.
• If compliant with the Code, the charity should disclose this fact in its annual report, for example in the Trustees Report.
• The Code applies on a ‘comply or explain’ basis: if a Charity has not complied with any part of the Code, it is required to provide an explanation.
• Charities must annually complete a Charities Governance Code Compliance Record Form, available from the Charities Regulator website. The form is not required to be submitted to the Charities Regulator unless specifically requested as part of a monitoring exercise.

The Charity Commission for Northern Ireland has produced guidance, factsheets, and other resources to support charities in maintaining good governance and meeting their statutory responsibilities. The Code of Good Governance, produced by the Developing Governance Group, while not a statutory code, has been widely endorsed as a practical resource for supporting charities in complying with governance best practice and their statutory obligations.

Further information on governance requirements is available from the Charities Regulator (Republic of Ireland) and The Charity Commission for Northern Ireland.

4. Managing conflicts of interest

If an accountant is asked to intervene in a dispute arising amongst trustees, staff, or volunteers of a non-profit, or between the non-profit and a third party (other than the accountant), it is important to determine whether there are any conflicts of interest to be managed. Given the often local nature of non-profits, and the level of community commitment and passionate support they receive, accountants should be particularly aware of disputes involving:

• other clients of the practice;
• any other partner or staff member in the practice;
• a close family member or friend of any of the above.

In some cases, an accountant may be providing services to a non-profit that they support for personal reasons, e.g. a family member benefits from the service of the non-profit. In such cases, the accountant is encouraged to consider whether they can provide objective advice to resolve the dispute, or whether any preconception or bias may affect professional judgment to the extent they can no longer be objective.

Section 310 of the Chartered Accountants Ireland Code of Ethics identifies certain measures that can be taken to safeguard threats caused by a conflict of interest. Some examples of measures include disclosing the conflict, obtaining consent, or resigning from the provision of services. Additionally, auditors have specific responsibilities under Ethical Standards applying to auditors.

5. Promoting transparency and filing full sets of financial statements

Many non-profits rely on public funding and/or private donations. Many also rely on broad support networks, including volunteers and other voluntary services. In an era where scepticism is plenty and trust is guarded, accessibility of information and transparency can make a big difference in efforts to attract significant funds and other forms of support. To address this, non-profits who are incorporated should consider publishing and filing full statutory financial statements (e.g. FRS 102 or FRS 102 Charities SORP). Indeed, they may be obliged to do so. Unincorporated non-profits should consider a similar level of transparency regarding their annual accounts.

The preparation of financial statements is ultimately the responsibility of the trustees/directors of the non-profit. They have statutory and fiduciary duties to act in the best interests of the organisation and to have regard to its stakeholders. However, they may seek the advice of the accountant who, as a fiduciary advisor, has a responsibility to advise and act in the client’s best interests. Current corporate governance codes and best practice reinforce the importance of accountability and transparency in the non-profit sector and encourage standards that are higher than minimum compliance with the law. It is important to ensure that these requirements are considered in making decisions or providing advice affecting the preparation of financial statements.

The Chartered Accountants Ireland Governance Resource Centre contains useful resources for trustees or directors of non-profits, such as the ‘Concise Guide of Ethics and Governance for the Charity and Not-for-profit Sector’ and the recently published ‘Owners’ Management Companies – A Concise Guide for Directors’.