Managing risks with related party transactions

4 Nov 2022

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Transactions with related parties, such as trustees, are a hugely important area to get right in your charity’s accounts and your governance procedures. The Charities SORP dedicates the whole of section 9 to the disclosure requirements around related party transactions, and notes that: “a transaction involving a trustee or other related party must always be regarded as material regardless of its size.” Even seemingly small transactions must be recorded on related party registers and may require disclosure in the financial statements.

The SORP notes that the reason this area is so important is for stewardship purposes to provide assurance that the charity is operating for the public benefit and that the trustees are acting in the interests of the charity and not for private gain.

Historically this is an area that charities have struggled to get right — the Charity Commission has opened hundreds of regulatory compliance and inquiry cases into ‘trustee pay, and concerns about trustee or other private benefits or trustee decision making.’

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

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.

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 and 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.

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.

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. Throughout the year you should keep 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. A standing trustee meeting agenda point can help to keep declarations of interest and related party transaction registers up to date.

Allow adequate time for review

The minimum disclosure requirements for the charity’s financial statements are set out in the SORP but 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.

If you have any questions regarding the points raised here, please speak to your usual Saffery Champness contact, or get in touch with Helen Wilkie.

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