TPR-Smaller-charities-and-the-SORP_0.pdf

TPR-Smaller-charities-and-the-SORP_0.pdf - page 1/59 - Smaller charities, SORP and issues of fi…

Smaller charities, SORP and issues of financial accounting and reporting

TPR-Smaller-charities-and-the-SORP_0.pdf - page 2/59 - Table of Contents

Table of Contents

TPR-Smaller-charities-and-the-SORP_0.pdf - page 3/59 - Introduction

Introduction

TPR-Smaller-charities-and-the-SORP_0.pdf - page 4/59 - Executive Summary

Executive Summary

TPR-Smaller-charities-and-the-SORP_0.pdf - page 5/59 - Where there was an understanding of the…

Where there was an understanding of the choice, both the small charity survey and the focus groups found many making a clear choice for R&P for reasons of simplicity, especially where the main readers of the accounts were seen as the charitys members or service users. But others made strong arguments for use of SORP to give a more realistic picture of the charity or to ensure certain assets or investments were more clearly reported. Others, however, seemed to think that SORP was required as a matter of compliance even when the R&P alternative was possible.

TPR-Smaller-charities-and-the-SORP_0.pdf - page 6/59 - classifications on the SoFA, was found t…

classifications on the SoFA, was found to be very low, even amongst professional accountants. Recommendation 5: This study provides further evidence supporting the calls for simplification of the SORP as it applies to small charities and existing simplifications such as the option for natural classifications on the SoFA clearly need much more publicity. But very few participants in this study appear to use the SORP itself as a source of guidance, so it will be vital to explain any simplifications through other means of communication.

TPR-Smaller-charities-and-the-SORP_0.pdf - page 7/59 - Quality of external advisor support Sma…

Quality of external advisor support Small charity respondents generally showed a high satisfaction of their external accountants when preparing annual reports and accounts, however the relatively high cost and lack of understanding the charitys context was noted. By contrast, Independent Examiners and accountants appeared dissatisfied with their fellow accountants advice and SORP compliance, and asked for more training, regulation and accountability of their sector.

TPR-Smaller-charities-and-the-SORP_0.pdf - page 8/59 - Methodology

Methodology

TPR-Smaller-charities-and-the-SORP_0.pdf - page 9/59 - Chartered Accountants (ICAS) and Associa…

Chartered Accountants (ICAS) and Association of Charitable Foundations (ACF). This resulted in 16 relevant publications informing the answers to the research questions, in particular on estimating the current use of SORP by small charities, and the reasons and barriers underpinning the choice (or not) to use SORP.

TPR-Smaller-charities-and-the-SORP_0.pdf - page 10/59 - accounts for, a further 436 were unusabl…

accounts for, a further 436 were unusable due to issues parsing and extracting the text contained within the documents. Thus, the final sample for analysis comprised of 12,310 accounts, 93% of which covered financial years ending in 2019 or 2020. Table 0.1 shows the comparison between the population, sampling frame, random sample and the analysis sample. On average, the analysis sample is biased towards larger organisations, those in England and Wales, and non-companies. These biases are expected given the following:

TPR-Smaller-charities-and-the-SORP_0.pdf - page 11/59 - Table 0.1. Representativeness of final s…

Table 0.1. Representativeness of final sample for analysis

TPR-Smaller-charities-and-the-SORP_0.pdf - page 12/59 - o Statement of Balances Based on these t…

o Statement of Balances Based on these terms, we employed two methods of classifying whether a charitys accounts were prepared using SORP:

TPR-Smaller-charities-and-the-SORP_0.pdf - page 13/59 - Table 0.2. Small charity survey sample c…

Table 0.2. Small charity survey sample characteristics

TPR-Smaller-charities-and-the-SORP_0.pdf - page 14/59 - surveys. Whilst such issues of the accou…

surveys. Whilst such issues of the accounts preparation process for charities have been explored previously in a number of studies, the focus group work conducted here is believed to be the first to bring together representatives of the full range of small charities registered with charity regulators across the UK. 26 individuals participated across the three focus groups, with no representatives from Northern Irish or Welsh charities: there was a 50:50 split between England and Scotland. In each group there was a range of indivduals representing the very smallest charities (in one case with as little as �2k income) up to those from charities not far below the �500k upper limit used for the definition of `small charity for the purposes of this study. (Note: The focus group stage of the research purely related to small charities � no attempt was made to recruit Independent Examiners to focus groups � although a few of the focus group participants mentioned that they also acted as accountants for other charities). Analysis of the details on charity registers or at Companies House for the 26 charities represented by these participants indicated that 10 were charitable companies (9 using SORP but one had filed microcompany accounts). Of the 16 non-company charities (including six CIOs or SCIOs), 10 appeared to be using R&P accounts and 6 SORP. So in total, based on the most recently filed accounts, the 26 focus groups participants comprised:

TPR-Smaller-charities-and-the-SORP_0.pdf - page 15/59 - Results

Results

TPR-Smaller-charities-and-the-SORP_0.pdf - page 16/59 - Table 1.1. Income thresholds and minimum…

Table 1.1. Income thresholds and minimum required accounting requirements for unincorporated charities, charitable companies and CIOs/SCIOs in the UK

TPR-Smaller-charities-and-the-SORP_0.pdf - page 17/59 - Research has been conducted amongst Scot…

Research has been conducted amongst Scottish charities registered with OSCR, which estimated that 39% of charities with income between �100k to �250k used receipt and payment (R&P) accounts, while 57% used SORP with a wide range of reasons to justify their choice of accounting practice (Alsop & Morgan 2019). Morgan & Fletcher (2011) conducted a desk-based study of 1,402 Charities Annual Reports of which 68% used SORP accounts (23% of �1-�25k charities, 42% of �25k-�100k and 86% of �100k to �500k - in 2011 the R&P option had just been extended to charities in the �100k-�250k band). Ten years on, it is unknown if these figures remain consistent in England and Wales and whether the reasons for smaller charities to choose to use SORP or R&P accounts across the UK continue to be the same. 1.2 Estimating SORP use by small charities Focusing now on the research conducted during this project, Figure 1.1 shows the unconditional estimate for the percentage of charities using SORP to prepare their annual accounts: we estimate 58% of the population of UK small charities use SORP, 18% use R&P, and 24% do not give a clear indication which accounting basis they use. We expand on the nature of these undetermined accounts at the end of this section. See this charitys accounts for an example of what we consider an undetermined accounting basis: https://accounts.dkane.net/doc/GB-CHC-1034689-20191231 Figure 1.1. Estimation of accounts type

TPR-Smaller-charities-and-the-SORP_0.pdf - page 18/59 - possibly due to issues downloading accou…

possibly due to issues downloading accounts for Scotland and Northern Ireland e.g., we do not have accounts for Scottish charitable companies, and only 99 for charitable companies in Northern Ireland. And finally, legal form is highly predictive of SORP use, which is expected as charitable companies of any size are required to file accruals accounts. However it is interesting that c. 10% of these charities file accounts that are ambiguous with regards to their accounting basis � see this example https://accounts.dkane.net/doc/GBCHC-701263-20200331. Figure 1.2. Estimation of accounts type, by income band

TPR-Smaller-charities-and-the-SORP_0.pdf - page 19/59 - Figure 1.3. Estimation of accounts type,…

Figure 1.3. Estimation of accounts type, by jurisdiction

TPR-Smaller-charities-and-the-SORP_0.pdf - page 20/59 - jurisdiction, or is it an artefact of no…

jurisdiction, or is it an artefact of not being able to sample accounts for charitable companies in Scotland? Table 1.2 presents the patterns of SORP use by income band and legal status, however this time disaggregated by jurisdiction. Therefore the question we are posing is: for a given jurisdiction, what is the association between SORP use and income band / legal form. The estimates for charitable companies in Northern Ireland should be interpreted very cautiously due to the very low numbers of charities in each income band (fewer than 99 accounts in total for these organisations). However, the fact the CIOs are not available in Northern Ireland means proportionally more charities are established as companies, so the overall proportion of NI charities required to use SORP is almost certainly higher than elsewhere. For non-companies, there is a clear income gradient in every jurisdiction: the larger a charity is, the more likely it is to use SORP. However we do not observe full compliance with SORP over the �250k threshold; some of this may be due to difficulties in determining the accounting basis from the PDFs, though we have classified a small proportion of these accounts as clearly being R&P. For non-companies, there is also a clear income gradient � in the opposite direction � with respect to undetermined accounts: smaller charities were much more like to produce accounts that were not clearly SORP or R&P in their basis.

TPR-Smaller-charities-and-the-SORP_0.pdf - page 21/59 - Table 1.2. Contingency table of estimate…

Table 1.2. Contingency table of estimated SORP use, by jurisdiction, income band and legal status

TPR-Smaller-charities-and-the-SORP_0.pdf - page 22/59 - 1.2.1 Examining undetermined accounts Ho…

1.2.1 Examining undetermined accounts How do we interpret the 24% of accounts that were classified as `undetermined by our scoring system? As a reminder, a set of accounts is classified as undetermined if it scores between -1 (slightly more likely to be R&P) and +1 (slightly more likely to be SORP). For the 2,968 undetermined accounts, 60% have a score of 0, 30% a score of 1, and 10% a score of -1: therefore for a majority of accounts it is difficult to say whether they are more likely to be SORP than R&P (and vice versa). Of the 60% of accounts with a score of 0, 95% refer to instances where none of the search terms are present in the annual accounts; some of this may be due to issues extracting the text from accounts, like this example of R&P here: https://accounts.dkane.net/doc/GB-NIC-105924-20180831. However there are still a substantial number of accounts where the text was extracted correctly but it simply is not clear which accounting basis was used: https://accounts.dkane.net/doc/GB-SC-SC04927320200531 and https://accounts.dkane.net/doc/GB-CHC-1103201-20170430. Charitable company accounts were more likely to lean towards use of SORP than noncompanies (figure 1.5 below). Figure 1.5. Distribution of SORP estimation score for undetermined accounts, by legal status

TPR-Smaller-charities-and-the-SORP_0.pdf - page 23/59 - Independent Examiner, whereas in England…

Independent Examiner, whereas in England and Wales this only applies to charities with annual gross income >�250k. If a similar requirement was implemented in the other jurisdictions, small charities may be more tempted to use R&P basis. Readers should note that the analysis presented here refers to registered charities, and thus we cannot speculate on the use of SORP by very small charities that are exempt or excepted from registering with the regulator in England and Wales.5 A distinctive finding of this research is the scale of accounts that have an undetermined accounting basis. Some of this will be the result of limitations associated with the text extraction process; however it is also revealing of the muddled, low quality reporting practices of some charities. In terms of making a decision of whether undetermined accounts are really SORP or R&P: 10% of the c. 3000 undetermined accounts were from charitable companies, who are required to follow the SORP by company law. Therefore we could assume that these 300 organisations, despite the ambiguity of their accounts, follow the SORP; this changes our estimate of SORP use to c. 60% of small charities, though conversely these cases may just be preparing company accounts with no consideration of the additional requirements for charities. We do not wish to speculate too much on the nature of undetermined accounts for non-companies in our sample, particularly those below the �250k threshold. However, we will conclude by stating a sensible upper bound of SORP use by small charities at c. 65%.

TPR-Smaller-charities-and-the-SORP_0.pdf - page 24/59 - 2. Why do some smaller non-company chari…

2. Why do some smaller non-company charities (i.e., those with incomes below �250k) choose to use the SORP rather than simple receipts and payments (R&P) accounting?

TPR-Smaller-charities-and-the-SORP_0.pdf - page 25/59 - 2.2 Survey evidence

2.2 Survey evidence

TPR-Smaller-charities-and-the-SORP_0.pdf - page 26/59 - We asked a similar question in the Indep…

We asked a similar question in the Independent Examiners / accountants survey: `What are the main reasons that those small charities chose to use SORP in preparing their accounts?. There were 95 responses to this question (73% of respondents) � see table 2.2 for the top five reasons. Note that these responses refer to small charities in general, not just non-company charities. Therefore it is unsurprising that the most common reason given was `compliance i.e., the charities were required to due to their size or legal form. Other common reasons were that SORP accounts present a `more accurate picture of the charity finances, were used to satisfy funders, grant making bodies or large donors, or because SORP had been used in the past (sometimes by previous accountants) and the charity wanted to continue to use SORP `as they had always done. A few respondents recognised that SORP accounts facilitate small grant making charities, charities with significant fixed assets or investments better. It was recognised that there are charities whose income fluctuates near the threshold of SORP accounts or anticipate growth and so SORP is chosen again to maintain consistency. Six respondents said that it is considered best practice / more professional for the charity to produce SORP accounts, and four respondents said that the charities they were working for had been advised to use SORP. Others commented that it provides better transparency or that some charities accounting software lends itself to accrual accounts. Only three respondents recognised that the charity had misunderstood that there was an alternative to SORP available to them.

TPR-Smaller-charities-and-the-SORP_0.pdf - page 27/59 - The reason SORP was considered unnecessa…

The reason SORP was considered unnecessary often reflected the capacity / size of the charity:

TPR-Smaller-charities-and-the-SORP_0.pdf - page 28/59 - Table 2.4. Top five reasons for choosing…

Table 2.4. Top five reasons for choosing R&P, Independent Examiners / accountants survey

TPR-Smaller-charities-and-the-SORP_0.pdf - page 29/59 - accounts. Others were aiming for simplic…

accounts. Others were aiming for simplicity because they saw the main users as being the members of the charity. One said:

TPR-Smaller-charities-and-the-SORP_0.pdf - page 30/59 - 3. To what extent do smaller charities u…

3. To what extent do smaller charities understand key charity accounting concepts such as fund accounting, grant recognition, fair value and reserves? 3.1 Background

TPR-Smaller-charities-and-the-SORP_0.pdf - page 31/59 - Table 3.1. Familiarity with key charity …

Table 3.1. Familiarity with key charity accounting concepts, small charity survey

TPR-Smaller-charities-and-the-SORP_0.pdf - page 32/59 - We asked the same questions in the Indep…

We asked the same questions in the Independent Examiners / accountants survey � see table 3.2. In general the assessment of familiarity is broadly similar to those of the small charities respondents, with the exception of `Recognition of grants or other income and `Fair value, where Independent Examiners / accountants are more likely to say small charities are unfamiliar with this concept. Familiarity with two additional concepts was examined: `SORP and other published guidance and `Requirements for preparing a Trustees Annual Report. For the former it is considered that small charities are very unfamiliar with this concept, while they are considered more familiar with the latter.

TPR-Smaller-charities-and-the-SORP_0.pdf - page 33/59 - It is worth noting that this represents …

It is worth noting that this represents a huge advance as a result of the modern charity accounting framework that took effect from the late 1990s: literature examining the impact of these requirements in the early days found many treasurers unable to cope with the additional requirements of fund accounting. Similar numbers also felt comfortable with issues of reserves, though in the focus groups some suggested that the SORP requirements could be clearer. Issues of grant recognition and fair value are more subtle and really only arise with accruals accounts (SORP format), and survey respondents reported lower levels of familiarity � although some participants mentioned specific concerns around the treatment of multi-year grants.

TPR-Smaller-charities-and-the-SORP_0.pdf - page 34/59 - 4. To what extent do smaller charities r…

4. To what extent do smaller charities rely on external accountants / Independent Examiners for advice and preparation of SORP accounts? Does this vary by the size of charity? Is this reliance expected to change in the future? 4.1 Background

TPR-Smaller-charities-and-the-SORP_0.pdf - page 35/59 - We see a slight / moderate association b…

We see a slight / moderate association between income band and use of external advisors � figure 4.2. Larger charities are more likely to rely on external advisors than smaller organisations, though all income bands are highly reliant on these stakeholders. Figure 4.2. Consultation of external advisors in preparation of charity accounts, by income band

TPR-Smaller-charities-and-the-SORP_0.pdf - page 36/59 - Figure 4.3. Distribution of workload in …

Figure 4.3. Distribution of workload in preparation of accounts, small charity survey

TPR-Smaller-charities-and-the-SORP_0.pdf - page 37/59 - Figure 4.4. Distribution of workload in …

Figure 4.4. Distribution of workload in preparation of accounts, Independent Examiners / accountants survey

TPR-Smaller-charities-and-the-SORP_0.pdf - page 38/59 - Bottom line is, I just give them [the ac…

Bottom line is, I just give them [the accountants] a sheet that has numbers in it, and then they give me back the official financial statement ... I just hand it off to them and then they produce the financial statements. [focus group participant] Some of the treasurers mentioned that they went to some trouble to distinguish restricted funds before passing information to their accountants: in one focus group more than half the participants confirmed that they were using fund accounting in their own books and records. Some said they included provisions for debtors and creditors (so in these cases the figures send to the accountants were on an accruals basis). But, even so, it seemed there was little understanding of the rationale for the presentation of the SORP accounts that came back. For the most part there was little evidence of treasurers or other trustees asking for amendments to SORP accounts prepared by external accountants. Many had little appreciation that the SORP presentation involved decisions and judgments by trustees, and it seems few of the external accountants made clear that the trustees should feel free to request changes. 4.4 Conclusion Many survey and focus group participants reported positive experience of guidance they received, particularly from their accountants and Independent Examiners, and the guidance from charity regulators (especially OSCR) was also mentioned by some. However, awareness of the SORP itself was more limited and whilst most were familiar with the term `SORP, few if any had used the SORP directly as a source of guidance. Nevertheless, many wanted to see more simplifications in the SORP for smaller charities, though relatively few were able to raise specifics. The awareness of the specific simplifications already allowed for smaller charities, such as the use of natural classifications on the SoFA, was found to be very low, even amongst professional accountants. As to whether reliance on external advisors is expected to change in the future, few focus group participants provided responses on this topic and it was not explored in the small charity survey either.

TPR-Smaller-charities-and-the-SORP_0.pdf - page 39/59 - 5. Could the SoFA and annual accounts gu…

5. Could the SoFA and annual accounts guidelines be improved / simplified to benefit smaller charities? Should the option of using natural classifications in the SoFA be promoted and possibly extended? What other simplifications in the annual accounts should be considered?

TPR-Smaller-charities-and-the-SORP_0.pdf - page 40/59 - Figure 5.1. Helpfulness of guidance for …

Figure 5.1. Helpfulness of guidance for preparing annual accounts and SoFA, small charity survey

TPR-Smaller-charities-and-the-SORP_0.pdf - page 41/59 - Table 5.1. Suggestions for improving ann…

Table 5.1. Suggestions for improving annual accounts and SoFA guidance, small charity survey

TPR-Smaller-charities-and-the-SORP_0.pdf - page 42/59 - Table 5.2. Suggestions for improving ann…

Table 5.2. Suggestions for improving annual accounts and SoFA guidance, Independent Examiners / accountants survey

TPR-Smaller-charities-and-the-SORP_0.pdf - page 43/59 - Some referred to guidance provided by th…

Some referred to guidance provided by their predecessors as the main source of help, but it seems this was often quite limited. One said:

TPR-Smaller-charities-and-the-SORP_0.pdf - page 44/59 - 6. Could the requirements of the TAR be …

6. Could the requirements of the TAR be improved / simplified to benefit smaller charities? 6.1 Survey evidence

TPR-Smaller-charities-and-the-SORP_0.pdf - page 45/59 - Figure 6.2. Accessibility of TAR require…

Figure 6.2. Accessibility of TAR requirements, small charity survey

TPR-Smaller-charities-and-the-SORP_0.pdf - page 46/59 - Figure 6.3. Importance of TAR for accoun…

Figure 6.3. Importance of TAR for accountability and transparency, Independent Examiner / accountants survey

TPR-Smaller-charities-and-the-SORP_0.pdf - page 47/59 - Again, there were comments about these r…

Again, there were comments about these reports not being sufficiently regulated. It was argued that with little or no feedback, charities may not know when they are not compliant.

TPR-Smaller-charities-and-the-SORP_0.pdf - page 48/59 - 7. Could the quality and consistency of …

7. Could the quality and consistency of support from external accountants / Independent Examiners be improved? 7.1 Background

TPR-Smaller-charities-and-the-SORP_0.pdf - page 49/59 - Figure 7.1. Satisfaction with support pr…

Figure 7.1. Satisfaction with support provided by external advisors in preparation of charity accounts, small charity survey

TPR-Smaller-charities-and-the-SORP_0.pdf - page 50/59 - Figure 7.2. Satisfaction with support pr…

Figure 7.2. Satisfaction with support provided by external advisors in preparation of charity accounts, by accounts type, small charity survey

TPR-Smaller-charities-and-the-SORP_0.pdf - page 51/59 - Satisfaction is generally high but respo…

Satisfaction is generally high but respondents also offered a number of suggestions of how the support provided by external advisors could be improved. We received usable responses from 229 respondents who also answered the question `If you consult an external accountant or Independent Examiner, how satisfied are you with the support they provide for preparing your charitys accounts?, and coded these into 14 distinct categories � see table 7.1. Perhaps encouragingly, the most common response was to express satisfaction with the support provided by external advisors. Understandably, concerns were expressed about the costs of external advisor support. The next most common suggestions related to wanting a more tailored, frequent relationship with the external advisor. Many respondents were clear in their need for external advisors to display greater interest in or knowledge of the charitys specific circumstances:

TPR-Smaller-charities-and-the-SORP_0.pdf - page 52/59 - A common theme developed across response…

A common theme developed across responses to various questions in the Independent Examiners / accountants survey: that other accountants and examiners were `giving poor advice and that it is a challenge for small charities to `find a good examiner. Some respondents asked for more regulation and feedback from charity regulators when accounts are not compliant, as `many remain ignorant, and Independent Examiners are `not challenged for non-compliance. 7.3 Focus group evidence Participants did not specifically address this topic in the focus groups (as we already captured detailed qualitative data in the small charity survey). However there are some insights worth reflecting on that touch on this topic. When discussing the role of guidance in preparing charity accounts, several participants spoke of the role of their external advisors. One said:

TPR-Smaller-charities-and-the-SORP_0.pdf - page 53/59 - 8. What changes would you like to see to…

8. What changes would you like to see to the charity accounting and reporting requirements that would make them more effective or more appropriate for small charities?

TPR-Smaller-charities-and-the-SORP_0.pdf - page 54/59 - Pro forma approach and a simplified requ…

Pro forma approach and a simplified requirements list for a small charity like ours. [survey respondent]

TPR-Smaller-charities-and-the-SORP_0.pdf - page 55/59 - Six responses recommended SORP being wri…

Six responses recommended SORP being written first for small charities, and larger charities have the extras added on, `so the minimum requirements are clear. No one proposed a separate SORP for smaller charities in this question. Accountants requested more templates and example accounts (e.g., of a charitable company below �100,000 that are using natural headings with an example TAR). There was also a suggestion of a `dashboard of key information of a standardised nature bringing consistency / comparability between charity reports.

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TPR-Smaller-charities-and-the-SORP_0.pdf - page 57/59 - Bibliography

Bibliography

TPR-Smaller-charities-and-the-SORP_0.pdf - page 58/59 - Morgan G. & Fletcher N. (2011) Public Be…

Morgan G. & Fletcher N. (2011) Public Benefit Reporting by Charities, Charity Commission, June 2011, Centre of Voluntary Sector Research, Sheffield Hallam University, Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_da ta/file/284708/public_benefit_reporting_shu.pdf Assessed on 26th April 2021 Morgan G. (Chair) (2019) Guiding the development of the charities SORP � Report and recommendations of the Charities SORP Governance Review, June 2019, Available at: https://www.charitysorp.org/media/647747/guiding-the-development-of-the-charities-sorp.pdf Assessed on 24th April 2021 Morgan G., Pienkowska J., Rutherford M. (2020) Survey of Charitable Funders Views of Accounts prepared under the Charities SORP, Available at: https://www.acf.org.uk/downloads/publications/SORPEngagement-GrantMakersSurveyReport-Dec2020.pdf Accessed on 8th February 2021 Sage Foundation, Charity Digital, Solid Bas Non-Profit Support (2021) Organisational Financial Literacy and UK Non-Profit Sustainability, Available at: https://d13kjxnqnhcmn2.cloudfront.net/AcuCustom/Sitename/DAM/047/Sage_Foundation_N PO_Success_OFL_Whitepaper.pdf Accessed on 23rd March 2021 The Chartered Governance Institute (2021) The SORP Trustees engagement Strand trustees questionnaire: Feedback report, March 2021, Available at: https://www.cgi.org.uk/assets/files/free-guidance-notes/sorp-trustee-questionnaire-feedbackreport.pdf Accessed on 23rd March 2021 Thompson J. and Morgan G. (2020) `Conferring ownership: approval of financial statements by small charities, Qualitative research in accounting and management, vol 17, no 3, pp354371.

TPR-Smaller-charities-and-the-SORP_0.pdf - page 59/59 - Acknowledgments

Acknowledgments