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Sex and financial scandals have rocked public trust in not-for-profit organisations and prompted tougher scrutiny. Good advisors have never been more in need…
Charities and not-for-profit organisations like these are valued and trusted, which is why they tend to feature highly in roundups of the most worthy destinations for public money. This should come as no surprise: organisations that help those in need, or offer valuable cultural, scientific or educational services without taking profit, have traditionally enjoyed widespread public admiration.
And yet that respect can no longer be taken for granted. In some countries, while faith in organisations like those mentioned above remains high, trust in the not-for-profit sector as a whole has plummeted. Recent research for the Charity Commission in the UK found that people now trust charities less than they trust a stranger in the street. In the US, a poll commissioned by the Chronicle of Philanthropy revealed that one in three Americans lack faith in the not-for-profit sector.
Despite a reputation for doing good, it would seem that we no longer instinctively regard not-for-profit organisations as good.
A Sector With ”A Problem”
“People clearly are less trusting of institutions and of those in positions of authority than they once were,” she said. “But that’s not because our parents and grandparents were more naïve. It’s because people now have more evidence to prove their suspicions. They are more sceptical of those in powerful roles or in positions that were once associated with respect because they can see or have experienced directly how those groups really have let them down.”
How have charities let us down? A series of high-profile global scandals have eroded public trust in the not-for-profit sector. Last year a sex scandal rocked UK-based global poverty charity Oxfam after its aid workers were found to have been using prostitutes in countries where they worked. At the same time, charities and not-for-profit organisations around the world are facing the public and regulatory pressure over high executive salaries and, in some cases, aggressive fundraising techniques.
The upshot is that third sector finances are under the microscope in a way they never have been before. The public, and the governments they elect demand ever-increasing accountability.
Marilyn Pendergast, a partner at US member firm UHY LLP in Albany, New York, says: “There is clearly a greater expectation and need for transparency in organisations that are publicly supported, whether through government sources or private donations, than for private companies which are not publicly traded. Both stakeholders and users of services have the right to expect openness and clarity in the information which is available to them.”
Not-for-profits face increased scrutiny from regulators on one side, and from organisations specifically created to monitor their spending on the other. Last year, for example, the group Charity Intelligence Canada publicly advised donors against giving to the charity of professional ice hockey team Calgary Flames, accusing the organisation of a lack of transparency and high fundraising costs.
Such scrutiny is becoming the norm and can be damaging. A Money for Good poll in the US found that a majority of donors favoured charities that received good ratings from charity validators like Charity Intelligence, despite some debate over how fair those ratings really are. As a result, not-for-profits have to be absolutely transparent about the sources of their wealth, how that money gets spent and what it gets spent on.
But the necessity for absolute transparency can be complicated by the sheer size and diversity of the sector. Marilyn Pendergast at UHY’s US member firm says: “Not-for-profits can be very small, such as a community food bank which relies solely on contributions from neighbours and volunteer services, or they can be large national or even multinational foundations providing charity resources with budgets in the multimillions. Their missions are also widely diverse. In the US they cover the gamut from agricultural research organisations to zoos and everything in between.”
Subarna Banerjee, head of UK member firm UHY Hacker Young’s national charity and not-for-profit group, says that there are 160,000 charity organisations in the UK, many of which are largely unknown to the public because they are “woven into the fabric of British business.” The larger public is generally unaware that they are operated by charities.
To take just one example, the large clothing retail chain Primark is owned by a company called Associated British Foods (ABF), and 59% of ABF is owned by an organisation called the Garfield Weston Foundation (GWF). GWF, the second-largest UK charity by asset size, is a family-founded trust which has supported UK charities with grants for the past 50 years. Few UK consumers will have heard of GWF, but many will know the institutions it supports, from the Shakespeare Globe Trust to the Imperial War Museum, Oxford University and the Yorkshire Sculpture Park.
UHY Hacker Young audits GWF’s financial statements, and Subarna says grants and large historic endowments are another ingredient in the nonprofit funding mix: “This is not public funding, either from individuals or through government grants, but it still needs to be thoroughly audited and accounted for.”
Regardless of the origins of their funding, governments and regulators are expecting more from charities, whose humanitarian or altruistic credentials are no longer enough to protect them from intense scrutiny.
In the US, new nonprofit accounting standards came into effect in 2018, requiring extra disclosures around not-for-profit classification, allocation of expenses and liquidity, among others. And Kirsti Armann, managing director at UHY member firm Revisorgruppen AS in Oslo, Norway, says that a similar spotlight is now directed at Norwegian not-for-profits and that tax and tax status is an area attracting particular scrutiny.
“It has also been the desire in Norway in recent years for greater transparency when it comes to the financial reporting of charities and not-for-profit organisations,” she adds. “In fact, over the past 15‒20 years the tax authorities in Norway have, to a greater extent than previously, exercised control over not-for-profit enterprises, especially regarding tax and tax position.”
With a requirement for greater transparency and reduced public confidence, many not-for-profits with limited budgets are finding it increasingly difficult to stay on top of expectations. This means keeping up with guidelines that can appear to change almost by the year. As in the US, the latest update to UK accounting standards for charities came in as recently as last November. In Norway, Revisorgruppen AS regularly assists not-for-profit clients with their transition to the ‘good accounting practice for nonprofit organisations’, a recently introduced alternative to the reporting required under the Norwegian Accounting Act.
Sungesh Singh, audit and assurance partner for New Zealand member firm UHY Haines Norton (Auckland) Limited, says that reporting regulations in the country have been changed twice in recent years, in 2005 and 2012, and that “quite strict reporting deadlines have been established.”
“The result, I would say, is that public confidence in the charities sector in New Zealand, from a reporting point of view, has become ‘moderate’. The transparency and the reporting requirements are relatively new, and I believe that it will take a fair while before it matures into a well-established reporting arena full of good information about what our charities do, where the money is spent and – most importantly – what the outcomes are.”
He adds that, since the new regulations came into force, charities in New Zealand have been struck off as a consequence of delayed reporting.
Still, the combination of growing complexity, greater scrutiny and a large and diverse sector offers opportunities for UHY’s global network to help. “The smaller organisations rely on us to make them compliant,” says Subarna Banerjee at UHY Hacker Young, London, UK. “And even the larger not-for-profits have difficulty keeping up with legislation. We can do that for them.”
Sungesh agrees: “Given the huge number of charities in New Zealand, and the increased level of transparency requirements from a reporting point of view, firms like UHY are very much in demand.”
Diverse Needs, Long Relationships
UHY LLP in Albany, New York, provides services to a range of not-for-profit organisations, from colleges and museums to healthcare and social assistance organisations. The needs of these organisations are diverse, and Marilyn Pendergast says they often go way beyond traditional accountancy services: “Chartered and certified public accountants can provide value to their clients in many ways in addition to the traditional audit and taxation functions.”
She continues: “For colleges, for example, changes in demographics of students and the lack of significant endowment funds can create budgeting challenges. That is where we can be helpful in the evaluation of expenditure, helping management and the board to develop a plan for future continuance and growth.”
Museums may face the need to upgrade facilities, requiring long-term financial planning. Healthcare charities need help navigating a changing regulatory landscape. Valuation and business planning services can be valuable for many not-for-profit organisations.
There are also very sound business reasons for developing a not-for-profit focus, says Subarna Banerjee at UHY Hacker Young in the UK. The success of campaigns like The Giving Pledge, which encourages wealthy people to give significant amounts of their wealth to philanthropic causes, have helped to spark a new philanthropy movement. UHY member firms may be more regularly asked about the tax or inheritance implications of charity donations and endowments, by individuals and businesses.
“It is also true that the charity sector is immune to some extent from the economic cycle,” he adds. “Not-for-profits, especially those who receive funding from the government and endowments, can be relatively financially secure, even in difficult times for the wider economy. For professional services providers, it is possible to forge very beneficial long-term relationships if you are prepared to stay on top of regulation, offer good advice when required and keep them compliant in the face of tougher regulation.”
The message is clear. As rules get stricter and public scepticism grows, not-for-profits need good partners – and the authority, expertise and accountability they bring – more than ever.