Appropriate reporting of related party transactions in the statutory accounts provides the public, including potential donors and grant funders, with confidence that the charity is working in the best interests of the public, not for private benefit. Following several public scandals, one of the main objectives of the Charity Commission, is to raise public confidence in the charity sector. The legislation surrounding related party transactions may seem onerous at times but it is an important area to get right for any charity.
Common pitfalls surrounding these transactions include:
- Understanding Related Parties: Related parties include more than just trustees and their own business interests. They extend to key management, close family members of trustees (such as parents, children, spouses/domestic partner, siblings, or grandchildren), and their business interests. The Charities Statement of Recommended Practice includes a full list of related parties which the board should be aware of.
- Transparency and Disclosure: Transactions with related parties need to be discussed at board level, with the relevant party removed from the meeting, and this should be documented appropriately. Since these transactions might need to be disclosed in the statutory accounts, trustees should carefully assess their appropriateness. If there is any unease with this then one might argue that the appropriateness of the transaction should perhaps be considered further. For accounts that are subject to independent examination or audit, refusal to disclose relevant related party transactions will likely result in a report submitted to the Charity Commission, potentially impacting the audit/independent examination reporting.
- Scope of Transactions: Related party transactions do not just relate to the use of charity funds, it also includes funds provided to the charity. If trustees make donations, these must be disclosed in the statutory accounts, and the board should be specifically aware of any donations provided by trustees with restrictions attached.
- Payments to Trustees: In certain cases, trustees (or their business interests) may be paid for goods/services if agreed that it serves the charity’s best interests. However, strict conditions apply, including proper written agreements, that must be met before payment can be made, to ensure legality.
Trustees have a duty of care to use charity resources responsibly. In entering into these transactions, trustees for the most part have charities’ best interests in mind. To comply with legislation and avoid issues, strong governance policies are essential. If there are ever any doubts, it is best to contact your charity’s advisers to discuss ahead of time.
This article was written by Amalia Chambers, charities manager at RRL.
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