18 September 2019 - Article
On 3 July 2017, the Charity Commission (the 'Commission') published its case report on the National Hereditary Breast Cancer Helpline (the 'Charity') further to its decision to issue an official warning to the Charity on 25 April 2017. The power to issue official warnings was introduced by the Charities (Protection and Social Investment) Act 2016 and came into force on 1 November last year, and this is the first time that the Commission has used this power. The Commission determined that an official warning was appropriate because the trustees committed a breach of trust or duty or have engaged in misconduct/ mismanagement in the administration of the Charity by:
- making unauthorised payments to a connected person;
- entering into an informal loan agreement with a connected person;
- improperly delegating the administration and management of the charity;
- failing to keep proper minutes and other records of decision making; and
- failing to properly implement and manage financial controls.
The Charity was randomly selected from a group of 94 charities whose accounts signalled that they may be in financial difficulty, as they included an 'emphasis of matter in relation to going concern'* relating to their financial position.
The Commission carried out a detailed study of the Charity's latest accounts and identified a number of concerns relating to the management of the Charity's finances. It then contacted the Charity to engage in further discussions and made two separate compliance visits to meet with the trustees and examine the Charity's records.
The Commission initially found that the Charity's assets had been exposed to undue risk because of a lack of financial controls and because the Charity's financial model was unsustainable (several of its shops were running at a loss and the Charity was heavily reliant on loans). Further, the Commission found that the Charity had made unauthorised payments to the chair of trustees. These payments were made for running the Charity's operations on a daily basis, and the trustee in receipt of the payment, was the only authorised signatory on the Charity's bank account and was therefore authorising payments to herself.
Additionally, the Commission found that the trustees were not meeting regularly to make collective decisions about how the Charity should be run to further its objects. Rather, the chair made decisions following discussions with individual trustees, and no records were kept of these discussions. Additionally, the Charity had received interest-free loans from a trustee for which no formal agreement or repayment plan was in place. The Commission therefore concluded that the trustees were failing to comply with their responsibility to manage and administer the Charity.
The Commission issued an Action Plan under section 15 of the Charities Act 2011 to the trustees in August 2016 in respect of these issues. At a subsequent inspection in October 2016 the Commission found that, while the trustees had made some progress with respect to the Action Plan, they had failed to comply fully with its terms. For instance, the trustees had added additional signatories to the Charity's bank account but had not implemented other financial controls required to ensure that the Charity's assets were not exposed to undue risk. Moreover, there were still no controls over the stock held in the Charity's shops, and the trustees had also failed to take the actions required to formalise the loan agreement. Although the trustee in question made a statement of intent in February 2017 to convert the loan into a donation, they still had not done so after the Commission's subsequent visit.
Further, while the trustees had held and minuted at least one trustee meeting, there was a lack of evidence that the trustees were making collective decisions about the management and administration of the Charity. Rather, they were continuing to allow the former chair to make key decisions about the operation of the Charity, despite her having resigned as trustee.
The Commission therefore determined that it was appropriate to issue an official warning in order to promote compliance. The official warning lists actions that the Commission considers should be taken to rectify the misconduct, mismanagement or breach of trust, which are to:
- ensure that any payments to individuals are made lawfully and that any appropriate consent from the Commission is obtained beforehand;
- ensure that any loan agreement provides sufficient protection of the Charity's interests and is both reviewed and documented sufficiently;
- ensure that all decisions are properly and adequately recorded;
- ensure that they alone take decisions regarding the management and administration of the Charity, and must delegate only in accordance with their duties; and
- develop and implement sufficient financial controls to ensure the Charity's assets are not exposed to undue risk.
Due to the sums of money involved as well as the actual work undertaken for the Charity, the Commission concluded that it was disproportionate in this case to pursue repayment of the amounts paid without authority to the former chair of trustees. The Commission also acknowledged in its report that the trustees have already taken some action in response to the official warning, including ceasing the unauthorised payments.
The Commission notes in its case report that this case demonstrates the importance of trustees being fully aware of their role and responsibilities and recommends that the Commission's guidance, The Essential Trustee, is the starting point in finding out what a trustee's role entails.
It is important to note that there is no right to appeal an official warning; therefore, it may be prudent for charities to review their governance practices to make sure that they avoid a similar result, as well as being aware that the Commission is ready and willing to use its new power. In this case, the Commission became involved at its own instigation (routine review of accounts). It will be interesting to see the Commission's approach where potential misconduct/mismanagement or breach of trust is brought to the Commission's attention by a member of the public or a whistle blower, in particular whether the Commission will issue an official warning before an Action Plan is developed.*This is a paragraph included in the auditor's report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's judgment, is of such importance that it is fundamental to users' understanding of the financial statements.