In response to requests from charities and their lead bodies, Benefacts produced a special report on Irish charities last May. Patricia Quinn explains the findings.
In Ireland’s charity sector, just as across the rest of the economy, the COVID-19 pandemic cast a long shadow. A sector of predominantly small and micro entities, charities experienced the full gamut of disruption to their not-for-profit businesses in 2020, ranging from temporary closure to rapid adaptation to digital working and developing new solutions to meet the needs of vulnerable people in local communities.
For some – especially providers of hospital, hospice, residential care, and homelessness charities – the impact for their staff and served communities was a matter of life and death. Other charities – especially in emergency relief, mental health, local development, and social care – experienced increased demand for their services.
In some sectors such as the arts, heritage, and museums, charities without the capacity to move to digital working methods could not operate, or only to a minimal degree. They report staff cutbacks and other cost-saving measures, but most have limited reserves and cannot avoid fixed costs.
Fundraised income, which is a significant proportion of the revenues of some Irish charities, was expected to take a severe hit. In some sectors that rely predominantly on traditional fundraising, including door-to-door or church gate collections, charity shops, fun runs and other event-based approaches, this has been the case. Where charities were already geared up to appeal to donors and collect gifts digitally, or transitioned successfully to online giving, some reported an increase in income from this source.
What do we know about charities?
Charities form a subset of all non-profits in Ireland, which number more than 32,000 if you drill down to the level of local clubs, societies, and associations.
The 11,405 charities on the Register of Charities today include just under 3,600 primary and secondary schools. For practical purposes, they are regulated elsewhere. The Register also includes about 2,700 unincorporated associations, trusts, and non-incorporated bodies that file accounts to the Charities Regulator which – for various reasons – are not published on the Regulator’s website.
Anybody wanting to study the financial and governance profile of the charity sector therefore relies mainly on the CRO (Companies Registration Office) filings of incorporated charities, of which there are about 5,000. These form the basis for a new benchmark report on the charity sector in Ireland released by Benefacts last month.
Benchmarking the state of the sector
There has never been a time when current, reliable data was more relevant to charities. In boardrooms around the country, trustee directors have been grappling with tough choices. Even the best risk register was unlikely to include a worldwide pandemic involving the near-total shut-down of whole sectors of the economy. And most charities are particularly ill-equipped to cope with financial adversity; by definition, they have no equity, no investors, and limited capacity to trade their way out of financial trouble.
Few charities entered 2020 with significant financial reserves. Although the aggregate reported value of reserves in the sectors under review in the Benefacts report was €3.73 billion based on available data for 3,628 incorporated charities, most of these reserves (€2.5 billion) are held by just 80 larger charities – in particular, voluntary hospitals and social housing providers. The remaining €1.2 billion in reserves is distributed across smaller charities, primarily in local development, social housing, health, and services for people with a disability. Moreover, charities’ assets – unlike most commercial organisations – typically cannot readily be liquidated as they are essential for delivering services or may be of a heritage or highly specialised nature.
When reserves are converted to the number of weeks of average weekly expenditure (using data from full accounts), our analysis found that more than one-third of charities have fewer than ten weeks’ reserves, with arts charities particularly heavily exposed.
Not all bleak
In preparing its report, Benefacts reviewed more than a dozen surveys and other reports prepared by sector lead bodies, policy-makers, and regulators. Many positive effects have been reported. These include heightened public awareness of the value of charities’ work, better engagement across geographic divides, cost and time savings, a better quality of life for staff, and the adoption of more diversified fundraising solutions – especially digital ones. In fact, it appears that a small percentage of charities that were already well-geared for digital fundraising will be reporting 2020 as a better year than usual.
Philanthropists stepped up in response, especially to pandemic-related causes, and social enterprises were encouraged to bid for new additional funding. The State permitted some charity employees to avail of pandemic unemployment benefits and allocated additional funding to address areas of acute need. Using financial reporting data shared with us in advance of the publication of their own financial statements by the nine State bodies that are the principal funders of charities, we were able to identify a 10.7% year-on-year uplift in funding for charities – mainly in health, social care, arts, and culture.
But in 2020, there were nearly ten pandemic-free weeks at the start of the year and lockdowns were partially lifted mid-year. Additional State support will undoubtedly have sustained some charities that might otherwise have gone under. But there’s already a recognition that 2021 – with the exit from full lockdowns only starting in the middle of the second quarter – will be a tougher year, and 2022 probably tougher again.
Planning for better
The last 30 years have seen considerable professionalisation in the charity sector. The 5,000 charities whose financial statements form the basis for this new report employ more than 101,000 people. Fundraising, a critical discipline in the 273 charities that rely on this as their principal source of income, has become highly specialised. The larger charities now have professional staff to manage their volunteer supporters. Even the voluntary directors of charities themselves are increasingly recruited using the kind of competency framework approach that would have been unheard of in this sector 20 years ago.
And perhaps it’s as well, since understanding the drivers of charity business success is a crucial function of charity boards. Contingency planning will surely come to the fore, as well as a searching review of some of the fundamental assumptions about funding. Benefacts has already received queries from charities trying to understand their position relative to their peer organisations in a given sub-sector, anticipating perhaps an even more competitive environment in the future.
Audited financial statements are a hugely valuable source of granular data that makes up the picture of any sector and its component entities. Like analysts in commercial sectors, Benefacts relies on charity company disclosures as the bedrock on which we build a profile of the charity sector and its sub-sectors. Common financial reporting standards bring consistency and reliability to the data that can be used to create a picture of the whole sector and track changes year-on-year at the level of individual charities and sectors such as hospice care, addiction support, or animal welfare.
Thanks to its database, augmented each year with more than three million new data items harvested from non-profit company disclosures, Benefacts has been able to provide charities, funders, policy-makers and other stakeholders with a powerful knowledge asset to help them navigate uncertain times.
The impact of regulation
The range of data underpinning our analysis of this multi-billion euro sector suffered a setback with the new Companies Act reform in 2014. For the first time, small non-profit (limited by guarantee) companies could avail of the same exemptions from filing full accounts as commercial companies. While this is only fair and equitable on the face of it, it has diminished the public disclosures of thousands of charities that rely on public donations, state funding, or both to support their operations.
Unfortunately, the Charities Act 2009 did not foresee this change and exempts charity companies from filing their accounts to the Charities Regulator to avoid the burden of double regulation. Again, fair and equitable – except for the unintended side effect of making the financial disclosures of thousands of charities less transparent to the very people on whom they rely for income and something more precious – trust.
Here are the numbers: of the 3,628 charities that have already filed their 2019 accounts, 36% have filed abridged accounts and 26% have filed unaudited accounts. 106 of these charities receive funding from the State. This means that their unaudited accounts breach the reporting standards for any body receiving State funding set by the Department of Public Expenditure & Reform (Circular 13, 2014).
Rules are there to be obeyed, and over time, the compliance authorities will surely iron out these wrinkles in the provisions of the various legal and regulatory frameworks.
But charities are not like other small businesses. The principle rather than the letter of the legislation regulating them is one of transparency. To that, I would add informed self-interest. Sector lead bodies preparing a brief for their board or a presentation for an Oireachtas Committee hearing are often disappointed to discover that Benefacts analysis of their members is missing some critical dimension – especially an analysis of their income. That is because so many of the source documents lack an important few pages: the income and expenditure account.
This is all the more galling as funders require the full accounts to be provided to them. We therefore experience a double standard – full accounts to go in the State filing cabinet, abridged ones for the rest of us.
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