Call for Reform of Charity Accounting Rules Continues to Grow

Pressure is mounting on the Charities Statement of Recommended Practice (SORP) committee to enact reforms on charity accounting and reporting. As the Charities SORP oversight panel concluded its nine-month investigation last June, the recommendation was to radically overhaul the current system. 

The independent review—chaired by charity practitioner Professor Gareth Morgan and supported by four charity regulators in the UK and Republic of Ireland—followed similar calls for reform regarding the Charity SORP’s focus and committee makeup. 

Major accountancy bodies such as ICAS, ACCA, CIPFA, and ICAEW raised their concerns back in 2018, while charity representative organisations have been pushing for change since 2017.

The Charities SORP Governance Review

The Charities SORP establishes what must be included in the financial reports of nearly every charity based in the UK. 

Amid growing criticism over the Charities SORP committee, especially with its slow resolution to the conflicting FRS 102 accounting rules and the Charities (Accounts and Reports) Regulations 2008, an Oversight Panel was set up in 2018 to conduct a complete governance review of the Charities SORP.

Apart from the FRS 102 issue, there were a number of other concerns the governance review sought to address:

  • Lax anti-money laundering controls and cross-border financial oversight
  • Increased costs and efforts on smaller charities due to complex accounting requirements
  • Reduced public trust in the charity sector because of financial misconduct
  • Proposed Reforms
  • Upon the completion of the review last June, the Oversight Panel made six important recommendations on reforming the Charities SORP: 
  • To meet the expectations of the wider public and beneficiaries, the SORP has to be refocused and smaller charities should have much simpler reporting requirements.
  • Retaining the Charities SORP Committee is recommended, but the size, composition, and clarification of the roles of the SORP-making bodies and the Committee all have to be reformed.
  • A wider group of stakeholders must be engaged with on a broader and consistent level.
  • Regulators and the rest of the charity sector must collaborate to identify and codify best practices in non-statutory financial reporting. 
  • With support from the Financial Reporting Council (FRC), the SORP-making body should guarantee that the redesigned SORP developmental process is applied.
  • Charity regulators have to secure sufficient resources for these recommendations to be realised.

These recommendations were made with advisement from a public consultation, as well as several events, where participants gave their perspectives during the governance review.

Professor Morgan expressed optimism for reforms, saying “I am confident that if the panel’s recommendations are implemented, the SORP will be considerably more effective in the future.”

Resolving Outdated Regulations

One of the primary reasons for the appeals to reform is the delay in resolving the incongruity regarding which regulations the charities need to follow for their reporting. 

When charities prepare their true and fair accounts, they also have to follow the Charities (Accounts and Reports) Regulations 2008, which then require compliance with the Charities SORP 2005. However, the Charities SORP 2005 was already replaced by the Charities SORP (FRS 102) back in 2015. Charities SORP 2005 has since been withdrawn by the UK Financial Reporting Council (FRC).

A workaround was suggested by the Charity Commission for England and Wales, recommending these non-profit organisations to utilise the principle of a “true and fair override” to legally circumvent the 2008 regulations.

The FRC have made significant changes to FRS 102 in the last Triennial Review in 2017, while there has yet to be a resolution to the Charities SORP 2005 and FRS 102 conflict introduced over three years ago.

Charity Bodies on Widening the Range of Stakeholders

Support for the Charities SORP Committee to include a wider array of representatives in the SORP-making process came from major charity bodies like the National Council for Voluntary Organisations (NCVO), the Directory of Social Change (DSC), and the Association for Charitable Foundations. 

The NCVO noted the limited representation of donors on the committee even though they are one of the main users of accounts. In line with this observation, the NCVO also suggested better involvement of smaller charities in developing the SORP. This is to balance their limited capacity relative to bigger charities.

With the DSC, they reiterated the need for “diverse stakeholders beyond the accounting profession” to take part in the committee, stressing these organisations’ perspectives must be integrated into both the process and the committee. 

The Association for Charitable Foundations, meanwhile, advocated for a better balanced advisory board with “greater representation of charitable foundations.”

From Focusing on Finances to Public Benefit

Urges for reform on what the SORP should prioritise also came from within the Charities SORP Committee. 

Last year, Laura Anderson, head of professional advice and intelligence at the Office of the Scottish Charity Regulator, as well as Nigel Davies, head of accountancy services at the Charity Commission, said that “public benefit issues should be at the centre of reporting and accounting and not an add-on.” Anderson and Davies both serve as joint chairs in the Charities SORP Committee.

Anderson and Davies’ statement was based on the 2008-09 SORP data that showed donors and funders do not make up the majority of stakeholders. They believe that beneficiaries, volunteers, charity staff, and the public have to be considered. 

With their concerns over what the trustees’ annual report should focus on, they brought up the following: 

  • The impact charities make on their advocacies
  • Transparency about trustees’ decision-making 
  • Addressing beneficiaries’ needs
  • How charities plan on meeting said needs

They also posed the question of whether the charity audit process should include how trustees identify the needs of beneficiaries, obtain value for money, and reconcile conflicts of interest.

If you need help making sure your charity stays compliant with regulations and laws, get in touch with our specialist not-for-profit and charities accounting team today.