Is Being Charitable a Risky Business?

There are over 160,000¹ charities in the UK and the support provided by accountants is impressive. Many may hold positions of trust, either through business or personal interest in charitable or not-for profit organisations. The sector is becoming more diverse with the onset of charitable incorporated organisations and tax-exempt community benefit societies. That in itself brings change and challenges, for example keeping on top of the Financial Conduct Authority (FCA) regulations.

So, What are the Risks Involved in Holding a Position of Trust?

• Tax (for example family and educational charities) and the charities trading subsidiaries where there may be exposure to losses and insolvency.
• Many charities now incorporate, adding directors’ responsibilities to those of the trustee. 
• Employment practices liability – a growing exposure with campaigns such as #MeToo and equality issues like gender pay gap and mental health adding to the risk of officers.
• Cyber attacks and data breaches – charities often hold confidential and sensitive information as well as monies. This creates the risk of first and third party cyber fraud, data breaches and related GDPR consequences.
• Regulatory exposure and defence costs in the event of allegations of misfeasance against you.

And the Biggest Risk of all?

The principal risk is financial crime, according to a recent report by Zywave.²  Fraud incidents are not only being committed externally, but also internally by staff, trustees or volunteers through false representation, failing to disclose information, and abuse of position*. The impact of financial crime on charities goes far beyond direct financial loss; it can also include distress and damage to the charity’s reputation as well as its fundraising prospects. The Charity Commission³ recommends that charities enforce financial controls and strong financial management and this duty can fall disproportionately on a chartered accountant trustee, as others will rely on their professional skill and diligence. In the event of problems, there will be heightened expectations of them to resolve issues – and to be held accountable for those issues.

So, when a problem occurs - who pays? It’s unlikely that a charity is able to indemnify a chartered accountant for the personal liability incurred whilst acting as a trustee or director. In the event of a suspected or alleged breach of duty, the time and costs involved in investigating and defending a claim could be substantial, even if successfully defended. Add to that potential claims for damages and claimants’ costs and you can appreciate the risk. So why do it? Before you reach for that keyboard to resign - don’t panic! 

For those employed or principals in practice, the firm’s professional indemnity insurance may automatically cover some individual personal appointments. You should make sure:

1. That the insurers are aware of the appointment(s).
2. That any payments are included in your declared fees.
3. That you stick to professional services as an accountant.

For others, you should review if the charity has a trustees’ liability policy or similar and that the charity allows such a policy to be bought. These often have a low minimum premium and will typically cover all past and present trustees.

If you have relinquished a position you also should ensure the body keeps the charity trustee liability policy going. This should protect you from claims coming in after you have left, as these policies operate on a “claims made” basis (you would be covered by the policy in force when a claim is made, not the policy in force at the time of your appointment).

These are some easy steps to take and members would do well to review the protection they have to help mitigate any risks they may face when holding a position of trust within a charity.

If in doubt, it’s always wise to pick up the phone and speak to your Professional Indemnity Insurance (PII) broker who is there to advise you.

_Sources

<sub>1. gov.uk/recent-charity-register-statistics-charity-commission
2. Source: Zywave. Charity Commercial Insurance Profile 1st Quarter 2018, December 2017.
3. gov.uk/charity-commission</sub>

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The information contained herein is based on sources we believe reliable and should be understood to be general risk management and insurance information only. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such.

Statements concerning legal, tax or accounting matters should be understood to be general observations based solely on our experience as insurance brokers and risk consultants and should not be relied upon as legal, tax or accounting advice, which we are not authorised to provide.