Trustees of major charities could find themselves held personally liable for accounting errors under proposed government audit reforms.
A government white paper called Restoring Trust in Audit and Corporate Governance, which was published in March, sets out proposals designed to strengthen the UK’s framework for major companies and the way they are audited.
The paper puts forward measures to amend the definition of a “public interest entity” (PIE) that could include charities in England and Wales with annual incomes of more than £100m.
It also proposes the creation of a new regulator, the Audit, Reporting and Governance Authority, that would have powers to take action against the directors, which in the case of charities would likely be the trustees, of organisations that make misleading statements about their finances.
A group of major voluntary sector organisations led by the Charity Finance Group warned the PIE definition change would “not achieve the intended policy aims in the context of charity and therefore may have unintended consequences”.
The CFG response, which is endorsed by 16 large charities including the British Heart Foundation, National Trust and Oxfam GB, says: “The proposed regime set out in the white paper will give the regulator new powers to take civil enforcement action against PIE directors in relation to breaches of existing PIE directors’ duties relating to corporate reporting and audit.
“CFG’s view is that the personal liability potentially inferred upon charity trustees as a result of the PIE classifications are largely unworkable and inappropriate in the charity context.”
The move could have a negative effect on trustee recruitment and further harm diversity in charity boards, the CFG response warns.
Caron Bradshaw, chief executive of the Charity Finance Group, said: “The government’s drive to increase trust and transparency is to be welcomed by all.
“However, we need to break this long but flawed habit of shoehorning charities into regulation and legislation designed for the for-profit world to avoid the unintended and harmful consequences such an approach brings about for the third sector.
“The robust legal and regulatory environment that charities operate within is not less than that applied to private enterprise.
“Government must ensure that it does not increase the burdens and costs placed on charities without there being a compelling case and a corresponding level of benefit, otherwise it will be guilty of reducing their ability to deliver effectively for their beneficiaries at a time of high demand and constrained resource.”
The consultation closed last week. The Department for Business, Energy & Industrial Strategy, which is overseeing the proposals, is expected to respond in due course.