Chair,

Independent Expert Group on Expenses

7 April 2010

Dear______ 

The Commission welcomes the report by the Independent Expert Group on Expenses and commends NVCO and CFDG for taking the lead in commissioning it.

In particular, we welcome the report's emphasis on the importance of good governance and the role of intemal control over the payment of expenses. We strongly endorse the call for charities to pay attention to their control procedures over the payment of expenses. Good internal controls with clear procedures for authorising and approving claims, and a clear lead from the top should be high on the governance agenda of all charities.

Whilst the report identifies little evidence of abuse of expenses or structural problems with the way expenses are handled in the sector charities should not be complacent They should remember that good governance underpins good practice in this area.

The survey responses point to confusion amongst some respondents on accounting disclosures for trustee expenses. The Commission will look at practice in this area and will look at what further steps we and others in the sector can take to enhance good practice and reporting.

We have set out in the annex to this letter our response to the group's recommendations. We will be placing a copy of this letter and the annex on our website as a public document supporting the general thrust of the group's recommendations. However, given that a General Election has now been called, we will not put these documents on the website until after 6 May.

Andrew Hind
Chief Executive

Charity Commission response to the recommendations of the Independent Expert Group on Expenses

1. We recommend that trustees of all charities should pay due consideration and proper scrutiny to the management of expenses as part of basic good governance and internal controls (existing practice).

We agree that sound financial controls underpin good governance arrangements. It is a duty of charity trustees to ensure that their charity’s resources are protected in order that the charity can fulfil its aims. It is important that all those working in the charity whether trustees, staff or volunteers take the issue of internal financial controls seriously. Internal controls should not be seen as just the responsibility of one or two trustees or senior staff members, or as applying to some but not others. There should be a culture of adherence to internal control embedded in the operations of the organisation; this culture is created by the trustees and senior management, who should lead by example. It is important that controls over expense payments are applied without exception to all those involved with the charity whether trustees, staff or volunteers.

2. We would remind charities required to comply with SORP that they must make the necessary disclosure of trustee expenses (existing practice).

The findings of our recent series of SORP Roundtable events, published in Charity Reporting and Accounting: Taking Stock and Future Reform demonstrated that all stakeholders expected SORP compliant accounts. There was an unequivocal view that the SORP was a force for good and that a robust reporting framework was vital for ensuring continued support and confidence in both individual charities and the sector. The report provides a timely reminder to trustees’ of the importance of accounting disclosures relating to their expenses.

3. We would also remind trustees that under SORP disclosure of trustee expenses includes expenses incurred on their behalf (existing practice).

The SORP is clear in stating that the disclosure of trustees’ expenses should include expenses settled by direct payment to a third party by the charity. Again, the report provides a timely reminder to trustees of the SORP’s requirements. We expect senior finance staff employed by charities and charity auditors to inform trustees where the required disclosures are omitted from the statutory accounts but the preparation of accounts and the disclosures made within them is ultimately the responsibility of trustees.

4. Trustees must ensure compliance with the tax and legal requirements regarding expenses (existing practice).

Internal controls over expenses are important in ensuring that unnecessary tax liabilities do not arise and that required returns are made to HMRC. Again, the report provides a timely reminder to trustees’ of their responsibilities. In particular, it reminds trustees that unless a dispensation has been granted by HMRC then a Form P11d will need to be completed and filed with HMRC detailing expense payments and benefits received by each staff member earning £8,500 or more. This recommendation is fully consistent with recommendations contained in our own guidance Internal Financial Controls (CC8) which will be further updated later this year.

5. We recommend that all charities that pay expenses have in place a formal, expenses policy (or policies) for trustees, staff - including the CEO and senior managers - and volunteers. The policy should be in line with the Charity Commission’s guidance on internal controls and should specifically include procedures in relation to the handling and approval of the expenses of the CEO where relevant (existing practice).

We agree that all charities should have a clear policy for the payment of expenses. This recommendation is fully consistent with recommendations contained in our own guidance Internal Financial Controls (CC8)which will be further updated later this year.

6. We recommend that all charities should ensure that the policy is clearly communicated to all staff, trustees and volunteers. It should be included as part of all induction processes (existing practice).

We agree. Clearly, for any policy to be effective, it needs to be communicated to those affected.

7.(a) We recommend that charities ensure their financial reporting makes it clear that there are adequate systems in place to manage expenses.

(b) We recommend that any note to the accounts includes a statement that expenses do not form part of remuneration (new practice).

We do not favour mandatory reporting on each and every control operated by a charity and believe that where such internal control statements are included within annual reports that the focus needs to be on the overall control environment. If a charity considered that there were particular risk areas to be managed then these can be addressed within such a statement. However, it would be wrong to assume that controls over expenses always require specific mention in risk or internal control statements.

There is certainly an argument that charities should include within their annual report a statement on internal controls. Whilst the SORP requires a risk management statement, we recognise that additional information that assists understanding of a charity’s risk management processes and systems of internal controls could enhance accountability particularly in larger charities.

Such internal control statements usually contain an acknowledgement by the trustees that they are responsible for the charities system of internal control and for reviewing its effectiveness. It should also explain that such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss.

The report recognises that the process involved in amending the SORP is complex and that the next revision of the SORP may not take place until 2012/13. We would not wish to seek changes to the SORP or accounting regulations for a single issue at this stage. The report acknowledges that any future consideration of reporting controls over expenses need to be set the context of reporting on internal control more generally. We agree with this approach and will therefore table papers for the SORP Committee’s consideration at a relevant stage in the development process of the next SORP.

We have not seen any evidence to suggest that readers of accounts assume that expenses should be equated with remuneration. Where the SORP’s disclosures are fully met then a brief explanation of the nature of expenses is provided. However, The SORP does not prohibit further disclosure or explanation where trustees believe additional information to be helpful to readers of accounts. Therefore trustees who consider a fuller explanation of expenses is desirable may choose to make it clear that expenses disclosed are not remuneration. Where a payment provides a personal benefit to a trustee or staff member then the SORP already requires the value of that benefit to be included within the remuneration disclosures of the accounts.

8. We recommend that, in the interests of promoting diversity and to avoid disincentives to volunteering, trustees should, as a matter of good practice, claim any expenses they incur in the course of undertaking their duties as trustees. If they do not want to retain the expenses they incur they should consider Gift Aiding the claimed expenses back to the charity (new practice).

We agree with this recommendation. In our own reviews of accounts, we have noticed trustees do not always claim expenses. In effect many trustees appear to choose to gift the costs they incur carrying out their role for the charity. Claiming of expenses and then gifting the money back to the charity through Gift Aid provisions makes good financial sense where these costs are significant. We agree that it is important that an environment is not created within a charity whereby trustees feel it is inappropriate to claim properly incurred expenses and thereby inadvertently discourage volunteering.

9. We encourage trustees to consider whether, in the context of their organisations and in the interest of their stakeholders, they should go further and disclose the expenses of individual trustees and senior managers. It is important that this is done in a meaningful way. Matters which trustees will need to consider in order to ensure that any disclosure has meaning include:

• the context in which they operate, including, for example, the type and area of charitable activity, the nature of the expenses and the sources of funding
• proportionality - taking into account the amount of expenses and the costs of disclosure
• reasonableness - whether disclosure is reasonable in the specific circumstances of the charity (new practice).

We welcome the considered approach taken within the report on this issue. Clearly, for the disclosure of trustees and senior staff expenses to be meaningful then the information provided needs to be set in a context of the charity’s activities and the role undertaken by senior staff.

Our view is that the decision whether or not to provide information on the expenses of trustees and senior staff should rest with individual trustee bodies. As recognised by the report, that decision will be informed by a number of factors, including proportionality. If a charity decides to provide detailed disclosure of expenses incurred by individual trustees and senior staff, we believe trustees should consider the use of the charity’s website as the means of providing this information rather than the annual report and accounts.

Recommendations to the SORP Committee

10. We recommend that the SORP Committee consider how the issue of expenses disclosure might be addressed as part of the development of the new SORP – for example, as part of a requirement for a statement of internal control (new practice).

In their report the Group remind trustees of the disclosure requirements in the current SORP (recommendations 2 and 3) and we note that they do not recommend a wholesale expansion of these current requirements. The report also recognises that the process of amending the SORP may not take place until 2012/13.

However, we recognise that in the context of the development of the next SORP it will be prudent for the SORP Committee to revisit the conclusions of this group. We therefore agree that further consideration should be given to the issue of expense disclosures and that this should take place within the timetable for the development of the next SORP.

As we have highlighted in our response to recommendation 7, we believe that any financial reporting of the internal controls over expenses needs to be considered in the broader context of an internal control statement. Such statements should review the effectiveness of internal controls generally rather than focusing on a specific area of internal control.

We will table papers for the SORP Committee’s consideration at a relevant stage in the development process of the next SORP.

Recommendations to the Charity Commission

11. We recommend that the Charity Commission review the level of compliance by trustees with the SORP requirements for the disclosure of trustee expenses (new practice).

The survey conducted as part of the group’s work indicated that as many as one in five charities do not fully disclose trustees’ expenses within their statutory accounts as required by the SORP. This may, in part, be due to charities that do not pay expenses failing to make a nil disclosure as required by the SORP. However, even allowing for this possibility, the survey evidence does suggest that compliance needs to be improved in this area.

We are currently carrying out a desk top review of compliance looking at a sample of accounts across charities of different sizes and will make our findings and conclusions available on our website.

12. We recommend that the Charity Commission consider how it can promote good practice in the management of expenses by charities. This might include, for example:

• a review of its advice and guidance for trustees which relates to trustee expenses and internal controls to avoid fraud; and
• considering ways in which it can highlight to charities the issue of expenses whether incurred by trustees or employees. Amongst other things this could include reminding charities about areas where there are requirements – for example, the SORP requirement to include a statement on trustee expenses where none have been paid (existing practice).

The Commission through its guidance and outreach work has a central role to play in promoting good practice. Sector leaders and umbrella groups also have a key role in developing good practice and its dissemination. In this respect, we congratulate NCVO and CFDG for providing leadership to the sector in setting up Expert Committee to review this issue and in publishing this comprehensive report.

We will continue to use our website, outreach work and liaison with the sector to promote good practice. The recommendations of the report are fully consistent with recommendations contained in our own guidance Internal Financial Controls (CC8)which will be further updated later this year. Our guidance Trustee expenses and payments (CC11)provides detailed guidance on what can be classed as legitimate trustee expenses. In addition, our Compliance Toolkit provides a further resource to assist trustees in protecting their charity from a range of issue that can harm a charity financially and reputationally.

In addition, we will add a page to our website setting out the reporting requirements for expenses and provide further guidance on areas where uncertainty appears to exist. For example, trustees’ expenses which are settled by a charity directly with third parties. We will also use CC News to remind trustees of their reporting duties in relation to their expenses. Finally, we will circulate this response to relevant umbrella groups asking them to highlight the key recommendations of your report to their members.

Recommendations in respect of the Code of Governance for the Voluntary and Community Sector

13. We recommend that the revised Code of Governance for the Voluntary and Community Sector should incorporate the recommendations on expenses contained in this report. Specifically, we recommend that the refashioned Code includes a reference to the responsibilities of trustees in relation to expenses in particular and internal controls in general (new practice).

We support this recommendation.

Recommendations to sector bodies

14. We recommend that sector bodies should, in consultation with the sector, develop model expenses policies for use by charities (new practice).

We believe that it is important for the sector to share good practice. We encourage NCVO and CFDG to take this proposal forward with the sector.

We would welcome the opportunity to use our website to signpost to good practice examples endorsed by sector bodies.

Recommendations to professional accountancy bodies and audit regulatory bodies

15. We recommend that professional accountancy bodies and audit regulatory bodies ask their members to highlight the SORP requirements relating to the disclosure of trustee expenses (existing practice).

The accountancy profession acting as independent examiners and as charity auditors have a vital role to play in promoting good accounting and compliance with the SORP. In particular, we expect charity auditors to discuss issues of non compliance with their charity clients and to report weaknesses in internal controls identified with the charity trustees. The role of auditors in providing assurance on reporting compliance is vital to the integrity of the charity sector. We will bring your report to the attention of all CCAB accountancy bodies.

May 2010