Charity Commission findings into charities that report high governance costs

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19 Nov, 2015

The Charity Commission has published the findings of a review carried out into charities that reported an “unusually high proportion” of their expenditure on governance costs. The review suggests that many charities may be incorrectly overstating their governance costs in their public annual returns or their accounts.

The Charity Commission performed a review of this area as normally, governance costs make up only a small part of a charity’s expenditure compared with the amount spent on charitable activities and the costs of raising funds.

The Charity Commission reviewed part B of the annual returns of charities to identify those that had reported both governance costs of more than 20 per-cent of their total expenditure and also reported total expenditure that was greater than 80 per-cent of their income in their most recently filed accounts – this consisted only of those larger charities with incomes over £500,000.   

A sample of 76 charities was reviewed to determine whether the charity’s trustees’ annual report and accounts provided a reasonable explanation for the high level of governance costs.

Findings indicated:

  • Only 4 per-cent of charities included a “reasonable” explanation for their high level of governance costs within their trustees’ annual report
  • 9 per-cent of charities in the sample did not have an unusually high level of governance costs but had completed their annual return incorrectly.  These findings mirror those of a previous charity commission review that found errors in annual returns with respect to the classification of charitable expenditure.
  • A “vast majority” of charities had allocated costs to governance costs that should have been allocated to other categories of expenditure.  The most common error was to equate governance costs with general management and administration costs.  A number of costs such as staff, office, depreciation and support costs should have been allocated to other categories of expenditure.

The Charity Commission comments that charities in the sample “appeared to be either not fully aware of the SORP’s requirements for reporting their expenditure in the SOFA or did not understand the difference between support costs and governance costs”.

The Charity Commission highlights that the findings “emphasise the importance of trustees having a good understanding of their charity’s activities and how these are reported in their annual reports, accounts and annual returns.  In particular, in emphasises the need for charities to understand their costs and how those costs relate to the activities that they are carrying out to achieve their objectives”.

 The press release and full findings are available on the Charity Commission website.

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