Official Report: Minutes of Evidence

The Chairperson (Mr Gildernew): I welcome the following officials to the meeting: Gareth McGleenon, chair of the not-for-profit subgroup of the Ulster Society of Chartered Accountants; Angela Craigan, chair of the Ulster Society of Chartered Accountants; and Dr Rosemary Peters Gallagher, vice chair of the society's not-for-profit subgroup.

Go raibh maith agaibh agus tá fáilte romhaibh.

Gareth, you are to deliver the opening statement, I think, and then we will have questions from Committee members. Go ahead.

Mr Gareth McGleenon (Ulster Society of Chartered Accountants): You will have to excuse me. I have a bit of a sore throat, which is why I am taking water.

The Chairperson (Mr Gildernew): Not at all.

Mr McGleenon: It may not a be bad thing that I cannot say too much. [Laughter.]

Thanks a million for the opportunity to provide input to the Charities (Amendment) Bill. As a subgroup in the sector, we are very supportive of the overall Bill. There have been developments, including the new SORP operating in the charity sector. Those things improve transparency, accountability and confidence in the sector.

The Chairperson (Mr Gildernew): Sorry, Gareth. You mentioned SORP: what is that?

Mr McGleenon: It is a statement of recommended practice. It is purely for accounting and auditing purposes. It was introduced recently for all charities at a certain level.

It was useful to be present for your session with the Charity Law Association. We agree with some aspects of its evidence and support its expertise.

I would like to comment on a few of the clauses in the Bill, which would amend the 2008 Act. Clause 3 is on official warnings. Our members support giving the Charity Commission the ability to issue official warnings. However, it is not clear what constitutes the circumstances in which an official warning needs to be issued and whether such a warning can be challenged and defended, potentially changing the decision. You talked about some of the processes around the issuing of official warnings: we agree that consideration of reputational damage is imperative in such situations. In the sector, the reputation of a charity can quickly be lost and may never be recovered, so, in that situation, such consideration is imperative. We support that provision as long as the charity has the right to defend and the commission does not potentially go public too early but gives consideration to the impact. Once the information is in the public domain, it could be too late, the reputational damage to the charity having already been done. We would like some consideration given to that.

Clauses 7, 8, and 10 deal with accounting, audit and reporting requirements. We support the requirement to allow different accounting and reporting requirements for different classes of charity and the provision to remove the requirement for independent examination of the accounts of charities with gross annual income under £20,000. That is largely to do with reducing the administrative burden on relatively small charities. Our question is on the ability of the Department to change the threshold by order only, rather than through some sort of public consultation. Communication of any threshold changes is vital, especially if the charities are not registered and may not therefore be notified of them. It is not clear whether the financial reporting template for charities with gross annual income of less than £20,000 will be updated, and risk is associated with lack of oversight of those charities.

The issue is not mentioned in this amending Bill, but, as a subgroup, we made representations that all charities should be registered. That is different from all charities being required to process accounts and whatever, but we thought that it would be useful to have a list of every charity registered in Northern Ireland. Allowing charities that are under a threshold not to register will still, potentially, lead to fraud and misappropriation of funds, with those charities totally dependent on the bona fides of their trustees. Not having an administrative burden allows such charities to focus on their public benefits whilst still allowing the opportunity for the Charity Commission to inspect them as required, but it is not clear whether that would even happen. While recognising the resource requirements of the Charity Commission, we considered whether it might be worth looking at the potential for spot checks on smaller charities. Our thinking behind that is that it would be similar to what happens with HMRC, which has the ability to carry out an investigation in any situation. The commission having the right to do the odd spot check may, in itself, provide a level of protection for charities.

A spot check would involve simply a conversation with the charity about what it had done as a charity, but that would improve confidence among donors.

Clause 9 refers to the definition of "gross income". We agree with giving the Department that power, but income in the charity sector is multifaceted in that regard. Some charities benefit from substantial endowments and legacies in a particular year. Their income can therefore fluctuate dramatically from one year to the next. That could be considered one-off income. The risk of moving up and down thresholds because of a one-off legacy or whatever needs to be considered. I know that there is the ability under company law for movement within thresholds, so that could be considered for one-off income as a way of avoiding confusion, given the lack of ability to submit the appropriate information in those periods.

The strengthened regulatory power is, in essence, about the appeals process and being able to defend a case prior to any action being taken.

The other bit that we have referenced is rural charities. In this day and age, given that there is so much IT capability and the ability to work remotely, the fact that a charity is rural should not impact on its requirements to provide the necessary assurances and information. That comes from somebody who lives in a rural community in Armagh and is involved in local charities. In our opinion, there is no reason why they should be treated any differently. With all the capability around IT, communication and whatever, there is no reason why a rural charity, be it in Fermanagh, the north-west or south Armagh, should be dealt with any differently.

We are supportive of the other powers to ensure good governance, good controls and good oversight of charities that operate in the sector.

On clause 2, the lawyers are much more capable of explaining that situation and have done so eloquently. We agree with their views on it. They have given consideration to the language and the definitions of "any purpose" and the powers to help to tighten the legislation.

On official warnings, we considered whether it would be possible for the Charity Commission — this would not be for inclusion in the Bill — to provide specific examples of things that would lead to such a warning being issued on the basis of cases that it had dealt with under its investigation powers.

I think that that is everything, unless my colleagues have anything to add.

The Chairperson (Mr Gildernew): OK. Thank you. I will start off where you finished on the information-sharing powers. You have stated that they are too wide-ranging: do you have in mind any specific restrictions or safeguards that should be added to the legislation? What risk would be posed if the current wording were to remain unchanged?

Mr McGleenon: We have no suggestions on that. We defer to our legal colleagues, who have articulated some ideas around that. We support their views on it. They are better placed than us to comment. Our members felt that "any purpose" and "anything" were too vague.

The Chairperson (Mr Gildernew): OK. Thank you. Kellie, were you indicating?

Ms K Armstrong: Yes. It is a similar question to the one that I asked the legal folk: it is about the commencement of the amendments. Clauses 7, 8 and 9 relate to accounts, but there is no date for them to come into play. The rest of it comes into operation on the day after Royal Assent, but clauses 7, 8 and 9, which are the parts about preparing accounts and so on, have no date. It means that, until those come in, small charities still have to comply with the existing requirements. Do you see that there needs to be a date on this?

Mr McGleenon: Yes. I do.

Dr Rosemary Peters Gallagher (Ulster Society of Chartered Accountants): I certainly agree with Gareth that there should be a date. At the minute, charities find things confusing enough with the new charity SORP accounting, especially those that are fluctuating between levels. We have had smaller charities where we do independent examinations, and, as Gareth says, if they get a one-off, lump donation, that automatically puts them into audit. There is a clause that states that you can contact the commission and ask for dispensation for the year, but we have always been told, "No". We could have something like the Companies Act whereby you have two years' grace if your company moves between bands before you need to be considered medium or large or before you need an audit. An extra level of uncertainty is not good.

Ms K Armstrong: OK. That came up when we heard the from Northern Ireland Council for Voluntary Action (NICVA), which wanted the dispensation to be extended to two years, and the Charity Commission itself said that it wanted that smoothing.

Coming to the end of a funding pot, I used to get a phone call to ask, "Could you spend £20,000 in a month?", and I said, "In a heartbeat". That was a boost of money that I had not been expecting at the end of the financial year, and that could have pushed us over.

Dr Peters Gallagher: I welcome that move or will do so when it comes in.

Ms K Armstrong: When that happens, how will that work from an accountancy point of view? Will a carry-forward amount be included in a charity's accounts for a year?

Dr Peters Gallagher: No. Normally, because it is a donation, the donation is recognised when it is received.

Ms K Armstrong: OK.

Dr Peters Gallagher: Unless it is something to do with restricted funding or whatever. I think of religious charities in particular: if someone passes on and leaves them half a million pounds when their normal income is £100,000, they are into a problem. We need to see more detail on how that would work in practice. It is confusing for charities at the moment, and it will become more confusing. They may be unsure of which band they are in and whether they need to move up or out of a band. It is that in and out and up and down. If charities are moving around between independent examination and audit or whatever, it will mean a lot of extra work for the commission as well.

Ms K Armstrong: My other concern relates to the fact that I have worked in organisations that had to have a zero balance by 31 March. To be honest, when you have money that will roll over, some civil servants see that as, "You have that money; we are not going to fund you any further". A lot of groups have a reserve policy that explains why they have money in the bank. I assume that there will need to be some consideration with accountants such as you to explain that so that it can be carried over. If it runs from, say, 2006-07 and then 2007-08 but extra money has been put into 2007-08, which makes it different from the previous year, how does that work?

Dr Peters Gallagher: That is where the smoothing and the two-year thing would help. You would see whether that was going to happen every year. However, it is a real burden, especially on the small charities, to have to pay for an audit when they will not need it the following year, if that makes sense.

Ms K Armstrong: It does, yes. It needs to be done, and it is a bit of money that you have to account for, but not all funders like to pay for that.

Dr Peters Gallagher: I know.

Ms K Armstrong: Thank you very much. Yes, that is good.

The Chairperson (Mr Gildernew): I would like to tease that out a bit because, from your perspective, the idea of all charities being registered is new. I would like to explore that a bit further. You have made it clear that you support reducing the administrative burden, which everyone would support. You mentioned your concern about fraud, reputation and misappropriation. How could we design a proportionate regime that reduces the burden without losing the transparency and assurance that registration would provide?

Dr Peters Gallagher: We have not given it a lot of thought, given that we are not sure what will happen, but, if the £20,000 limit comes in, it should not be beyond the bounds of possibility that the charities register. If charities register and the trustees are registered, the general public can say, "Ah, there is a small charity, and that is what it does".

A one-pager could be submitted to the commission annually to show how the money had been spent, meaning that the full trustees' annual report was not needed. That might be possible.

Mr McGleenon: It is also about confidence. If the general public and donors had a site that they could go to when a small or local charity was set up, it would give them confidence that, at least, it was registered. We do not expect charities to have to do a lot of administration other than registering the address of the office and the names of trustees to give transparency. At some stage, the commission could have a chat with a charity about how it operates. That would give confidence and could allay the risk of smaller charities with a turnover of less than £20,000 doing whatever they wanted and not operating for the public benefit or on behalf of donors.

Ms Angela Craigan (Ulster Society of Chartered Accountants): I will pick up on a small point. When a person is completing their tax return, one of the first things that our tax team will ask is whether a donation that was made was made to a registered charity, because, if so, they will get tax relief on that. If it is not registered, how can we say that it is a registered charity?

The Chairperson (Mr Gildernew): My final question is about the additional scrutiny by the Assembly of some of the delegated powers. You argue that some of them should receive a higher level of scrutiny. What powers do you consider to be significant enough to warrant the additional scrutiny? What are the risks of leaving the powers to a less intensive procedure?

Mr McGleenon: I cannot answer that question; I would need to review the powers. When we discussed the powers, we felt that another layer of oversight would be useful. I will need to reflect on the question and come back to you, if that is OK.

The Chairperson (Mr Gildernew): That would be useful.

Mr McGleenon: It is around the importance of good governance and independence and having another set of eyes looking over the situation to segregate the duties, which is important on the accounting side of things.

Ms K Armstrong: One thing that came up in the previous mandate — it is starting to bubble in my head now — was that charities with a turnover of less than £20,000, although they still had to register, were disapplied from auditing. In this part of the world, there are worries that paramilitary groups could be hiding behind charities, and they tend to be the charities that are under the £20,000 threshold. If one of those was investigated and had been raising money for nefarious reasons, what would an accountant look for to identify those reasons? What should be included in a template for smaller groups to clarify that?

Mr McGleenon: That is the money laundering side of things, and accountants are not obligated to specifically look for those situations. The legal side has more of a scrutiny role, but there is an obligation on each charity, whether large or small, to make sure that it is comfortable with the bona fides of each donation in order to limit the risks of potential money laundering. The other two guys here are auditors, and, from an auditing perspective, while there is no specific requirement to go looking for anything, it is in case you identify anything unusual that needs to be clarified.

Dr Peters Gallagher: With such a small charity, it is not likely that auditors will be involved. Nearly anyone up to a certain level can sign off on a set of accounts for a charity, and they may not be looking for fraud. They may be signing off the accounts for friends or whatever. When an auditor signs off on accounts, we go through an anti-money laundering procedure before we onboard a client. We will not pick up everything, but we hope to pick up anything unusual. We have to be alert. We are not there to seek out fraud, but we have to be alert to the possibility of it. If anything looks unusual — for example, you are getting £2,000 a month from Mickey Mouse — you have to ask what that is about. It is about being sensible. The very small groups will be difficult because they do not need to be signed off by a qualified accountant.

Mr McGleenon: We have suggested that, for those charities, the commission would have the power to do spot checks, a bit like what I said about HMRC. The ability to do that might be sufficient for people to be on guard, but, at the same time, it would be useful to do spot checks to ensure the bona fides of the whole operation.

If a template is produced, the commission can ask a charity to demonstrate its 10 different sources of income in a particular year, thereby getting as much satisfaction as it can without digging too deeply. That might be a good mechanism to put people on alert.

Ms K Armstrong: During COVID, we had issues with lawn bowlers: five men and a bag of bowls. They did not qualify for COVID moneys and felt left out, but they said, "If you give us a template, we will know what you are looking for", which was basically income and expenditure. They used Jimmy's bank account because the money involved amounted to only £5·50 a week. It is about proportion and having a template that is reasonable and easy to complete.

Mr McGleenon: If it would be of any benefit, we, as the subgroup, could review a draft template and comment on it. The guys here regularly audit charities of all sizes, and internal audit is carried out on the larger ones. We could review the template, and, if we thought that anything beneficial could be added to it, we could give our tuppence worth.

The Chairperson (Mr Gildernew): Thank you. If you could give us a further steer on your thoughts on those powers, that would be great. It is an issue that comes up in Committee often, so I appreciate your bringing that to our attention.

Gareth, Angela and Rosemary, thank you very much for your evidence and submission and for taking the opportunity to advise the Committee on its scrutiny of the proposed legislation.