Trustees roles and responsibilities and the necessity for accurate up to date financial information

Trustees roles and responsibilities and the necessity for accurate up to date financial information

In the first of a series of articles looking at how the charitable and not for profit sector can survive the ongoing economic stagnation, Stephen Goderski, Head of Advisory at PKF Littlejohn Accountants and Business Advisers, explores the vital role that trustees should play in monitoring the robustness of their organisation’s financial performance.

Trustees can be in an anomalous position if they were directors of a company, by way of example, their position would be clear – deliver results or face the consequences of not doing so (generally dismissal or insolvency).  Assuming they are successful business people, they would undoubtedly have created an environment where each team member’s accountability is known, those people being qualified for their roles and their reporting structures understood (the shop floor worker to the foreman to the manager to the head of division to the board).

At some point in their business life, possibly as a result of a personal experience, they want to give something back and get involved in the third sector – usually in a Trustee role for which they have, successful business career notwithstanding, no direct experience or qualifications.  They are therefore reliant on their fellow Trustees and the organisation’s management for guidance, which can quickly become a case of the tail wagging the dog.

It gets worse; not only do Trustees have all of the responsibilities they would expect as a company director, they also have additional fiduciary responsibilities expected of them by both the public at large and, more pointedly, the Charity Commission.  On top of this, as the new kid on the Trustee block, they often lack the power or influence they enjoy in their private sector life.

There also seems to be a feeling, which I have seen in practice many times over the years, that because a Trustee’s role is voluntary and or unpaid it is not subject to the same scrutiny or rules that a private sector director would expect.  Why a Trustee would imagine this to be the case I cannot explain – and neither have the Trustees with whom I have worked who have been caught up in this feeling of invincibility as if running the organisation is just a game to play with no consequences if it goes wrong.

Let us put that to bed straight away – the role of a Trustee is at least as onerous as any equivalent position in the commercial world and if Trustees get it wrong there will be consequences and they may suffer personal repercussions.  It is therefore vital that a Trustee approaches their role with due deference, a clear vision of how they can help the organisation and with a healthy scepticism of the organisations existing capabilities and practices.  A critical eye can be a very useful asset here as is the very simple question “Why?”

Keeping your eye on the money

Governance is the raison d’etre of a Trustee.  Presumably the organisation’s existence revolves around maximising money raised for a particular cause.  Trustees therefore need to be mindful of (in no particular order of importance):

  • The organisation’s financial performance

  • The costs of running the organisation

  • Spending decisions

  • Investment options

  • Restricted and unrestricted funding levels

It is therefore vital that Trustees are provided with appropriate financial information to allow them to make informed decisions and that they understand both these figures and the assumptions underlying them (in the case of forecasts).  Relying on others to spot warning signs is particularly inappropriate and can lead to serious consequences in the event of a failure of the organisation’s business.

I always despair when I ask a Trustee for financial information and get handed the last set of accounts.  As you and I both know, in 99% of cases they are hopelessly out of date before they have even been signed off and I make no apology for stating that any Trustee that relies on them to run an organisation is simply not doing their job properly.

Let us be clear here, it is a Trustee’s duty to ensure they have access to sufficient financial information to enable them to discharge their responsibilities.  As a bare minimum, such financial information will include:

  • Income and expenditure account

  • Profit and loss account

  • Balance sheet

  • Cash flow forecast

The income and expenditure account and balance sheet should be updated monthly.  Income and expenditure should be monitored against the budget and any variances (and their consequences) noted and discussed and a note kept of such discussions and decisions made (a drop in income might reasonably lead to a delay in the implementation of a project for example).

Does that seem right?

If a Trustee is unclear about any aspect of the financial information with which they have been presented it is their responsibility to probe into the information, its underlying assumptions and its potential consequences until clarity has been obtained.  

Decisions made on flawed or misleading data can be as damaging as those made using no data at all. Many organisations do not have appropriate in house skills to properly record financial transactions and as a result accounts can be inaccurate or incomplete.  This can obviously have serious implications and can mean that the Trustees do not have an accurate picture of either their recent trading performance or current financial position; they may therefore be asked to make important strategic decisions on the basis of flawed information.  Before doing so Trustee’s should perform he following simple tests

(i) do the audited accounts significantly differ to those presented in management information,
(ii) how accurate do forecasts tend to be and
(iii) how convincing are any explanations of variances in either case?

Budgeting too is a skill which may be in short supply as organisations tend to succumb to the (understandable) trait of hiring people based on their cost rather than their usefulness. Over optimistic assumptions of future income (last years plus 20%), overambitious budgeting for costs or a failure to understand cash flow requirements are good areas to start using the critical eye mentioned earlier but be warned, if you receive the reply “we’ve always done it that way” it is time to be very afraid indeed!   Businesses are like dinosaurs – they evolve or they die!

It should go without saying that all financial information should separately record restricted and unrestricted funding and that all restricted funding should be appropriately ring-fenced, for obvious reasons.

In the next article in this series I look at warning signs contained within financial reports that could give Trustees advanced notice that their organisation is facing difficulties and explore ways of mitigating the effects of a financial crisis.

Stephen Goderski heads up the advisory division at PKF Littlejohn which incorporates restructuring and insolvency and is in his 34th year in the profession.