Key Compliance Risks for Charities

Posted by

Matt Green

on 28 May 2024

It can be challenging for charities, especially smaller ones, to find the time and resources to keep up with all the latest regulatory compliance requirements.

Charity Compliance Risks

Compliance is crucial for charities to maintain public trust and ensure the well-being of stakeholders and the organisation itself.

Tips for Charity Compliance

  1. Keeping Up With Regulations for Charities
  2. Mitigating Key Charity Compliance Risks
  3. Charitable Transparency & Accountability
  4. Charities Compliance Resource Constraints

A history of non-compliance can seriously damage a charity's reputation, making it harder to attract donors and volunteers. Importantly, by following compliance guidelines, charities can avoid hefty fines or even closure.

A. Keeping Up With Regulations for Charities

The regulatory landscape for charities can be complex and ever-changing. 

The Charity Commission regulates charities in England and Wales, ensuring compliance and providing guidance.

There are five key areas of compliance that charities need to consider:

i. Governing Document

Each charity's governing document outlines its foundation and operation. It sets out rules for trustee appointments, meeting frequency, decision-making processes, and activity limitations. 

ii. Charity Legislation

The Charities Act 2011 is the primary law governing charities. It outlines essential duties for trustees, public benefit requirements, and reporting obligations.

It replaced earlier legislation and was recently amended. Trustees must ensure the charity operates within the legal framework set by this Act.

The Charities (Protection and Social Investment) Act 2016 introduced changes around investment powers and spending rules for permanent endowment funds.

iii. Financial Reporting

Charities are required to submit annual reports and accounts following the Statement of Recommended Practice (SORP) for charity accounting. The specific requirements depend on the charity's annual income.

iv. Fundraising

Fundraising activities must comply with regulations set out by the Fundraising Regulator. This includes following the Charity Fundraising Code of Practice which ensures ethical and transparent fundraising practices to protect donors.

v. Other Compliance Obligations

It's important to note that, like all other employers, charities are subject to general laws, such as those on tax, data protection, and health and safety.

B. Mitigating Key Charity Compliance Risks

Charities face a number of compliance challenges that can threaten their operations, reputation and fundraising.

They are susceptible to risks such as fraud, money laundering, and mismanagement of funds. Strong compliance procedures help mitigate these risks and protect the charity's reputation.

i. Financial Reporting & Fundraising

Charities need to ensure their finances are accurately reported and follow regulations regarding fundraising activities.

This includes proper accounting practices, transparent donation tracking, and adhering to licensing requirements for raffles or lotteries.

ii. Data Protection

Charities collect and store personal information from donors, beneficiaries, and staff. This information needs to be managed safely, which requires secure storage systems, clear data retention policies, and proper consent for data usage.

If a charity fails to comply with data protection regulations (including GDPR) it can result in fines and reputational damage.

Free GDPR Self-assessment Questionnaire

iii. Safeguarding

Charities that work with vulnerable people, especially children, need robust safeguarding policies. Also, those managing staff both at home and abroad, including volunteers, have a duty of care to them like any other organisation.

These policies must include training staff and volunteers, clear reporting procedures, and background checks.

Previous scandals have had a huge impact on charities like Oxfam, damaging their reputations, deterring donations, and causing large contributors, including governments, to defund them.

Free Vulnerable Customers Checklist

C. Charitable Transparency & Accountability

Building trust with donors is essential for charities.

This means being able to show that donations are being used effectively and ethically. Donors are looking to put their money into companies that are not only profitable but also responsible and sustainable.

Charities are increasingly being judged on their ESG performance, alongside traditional financial metrics. ESG stands for Environmental, Social, and Governance. It's a framework for assessing an organisation's sustainability and social responsibility.

i. Environmental

The environmental aspect of ESG considers how an organisation impacts the environment. It includes factors such as climate action, reducing pollution, and effective resource management, as well as energy efficiency.

ii. Social

The social aspect of ESG examines how each organisation interacts with its employees, customers, and the community. It covers everything from labour practices, diversity and inclusion to community engagement.

iii. Governance

The governance aspect of ESG covers leadership structure, executive pay, board composition, transparency, and accountability. It measures compliance in areas like financial reporting and conflicts to help maintain transparency.

ESG Compliance Roadmap

D. Charities Compliance Resource Constraints

A report by the Centre for Social Justice revealed that there has been a £4.6 billion fall in revenue at smaller charities, those with income of less than £1 million a year, since the Covid pandemic.

Many charities, particularly the smaller ones, don't have the staff or financial resources needed to devote to a robust compliance program.

In larger organisations, there is often a dedicated member of staff who handles training and record-keeping. But charities rarely have that luxury, meaning the Office Manager or CEO has to take on the responsibilities.

However, following a few simple tips, those without a compliance manager can still reduce the risk of breaches.

Compliance management software is relatively inexpensive and can help you ensure everyone is trained properly. It also shows the regulators that you made an effort to avoid breaches, should one occur. This may make the difference between a small fine or one that threatens your business.

For those areas that inexpensive software cannot cover, free resources are available to help you develop and implement necessary policies, conduct regular audits, and conduct staff compliance training.

Free Compliance Audit Checklist

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