Managing risks with related party transactions

5 Sep 2019

lightbulb

Speaking at the ICAEW’s annual Charity Conference in June, Mike Ashley, a Charity Commission board member, criticised charities that continue to make basic errors in their accounts, including “a seeming lack of understanding of the requirement to disclose transactions with related parties or to confirm that there are no transactions with related parties.”

 

Here are our top five tips to help you to manage your risks in this challenging area:

  1. Get to grips with the definition
    There is often confusion over what constitutes a ‘related party’, leading to either insufficient or excessive disclosure. Related parties include:
    – A charity’s trustees and their close family members and those entities which they control or in which they have a significant interest; and
    – Any subsidiary, joint venture or associate of the charity.
    Every charity has related parties.
  2. Ensure that you have complete information
    It is good practice for trustees to declare interests upon appointment and to confirm these at least annually. We recommend that trustees complete a standard form that has been written in plain English. Nil returns should be challenged – in our experience, it is rare for trustees to have no other interests and a nil return may reflect a misunderstanding as to what information is being requested and why.
  3. Create a register of interests
    Creating a register of interests is an effective way to capture details of trustee interests and to share this information within the organisation. We recommend that you delegate responsibility for maintaining the register to a specific employee (usually the person responsible for company secretarial matters). The information held on the register will be subject to the provisions of the EU General Data Protection Regulation (GDPR). You will need to consider who should have access to the register and ensure that appropriate measures are in place to safeguard the data.
  4. Be alert to transactions with related parties
    Related party transactions include purchases or sales of goods, supply of services, donations and grants, provision of loans and guarantees. All related party transactions should be carefully considered to ensure that they are in the best interests of the charity. At year end you should make a list of related party transactions that have occurred in the reporting period. You should share this list, and the register of interests, with your auditors.
  5. Allow adequate time for review
    Charities SORP (FRS 102) sets out the minimum disclosure requirements for the charity’s financial statements. These are not always well understood. Certain related party transactions do not need to be disclosed, whilst others can be disclosed in aggregate. If there have been no related party transactions in the reporting period that require disclosure, this fact must be stated. Make sure that your year end timetable allows sufficient time for review of the disclosures. This will help you to identify errors and omissions. It will also give you time to seek advice regarding any areas of uncertainty or judgement including how best to report on potentially sensitive information.

 

Helen Wilkie, Senior Manager

Go back to Charities Briefing September 2019 home page

Loading