In the dog house: key lessons for trustees
Last year, the Charity Commission took action against a charity after uncovering serious financial mismanagement and numerous failings, including the purchase of a Rolex watch with funds from the Charity’s bank account.
Samantha Pritchard, partner, and Victoria Walton, solicitor apprentice, both in our charities team, discuss the actions taken by the Charity Commission and the key lessons to be learned.
Background
Muffin Pug Rescue (the Charity) was set up in October 2015 for the purpose of relieving the suffering of pugs in need, promoting humane behaviour towards pugs and preventing cruelty and suffering among dogs.
The Charity appeared on the Charity Commission’s radar as early as 2016 for failing to submit its accounts and annual returns. The trustees continued to fall short of their obligations and, in February 2021, the Charity Commission opened a full investigation into the Charity’s activities (the Inquiry). The Inquiry unearthed a number of failings, in particular by a mother-and-son trustee duo.
Findings
Some of the key findings and takeaways from the Inquiry include:
A failure to comply with legal obligations
Despite multiple attempts by the Charity Commission to engage with the trustees, the trustees repeatedly failed to submit annual accounts (which may constitute an offence under the Charities Act 2011).
In 2021, the Charity hired an accounting firm to produce the Charity’s overdue accounts. However, the firm dropped the Charity when the trustees failed to provide the necessary information.
In September 2022, another accounting firm was instructed to produce the overdue accounts. It was not until the mother-and-son trustee duo were suspended by the Charity Commission, and new trustees appointed, that the relevant information was gathered and the overdue accounts were submitted.
The accounts revealed a number of issues, including errors in the Charity’s gift aid claims, which led to a significant debt of £213,567 owed to HMRC.
Key takeaway: It is important for trustees to comply with their filing obligations and keep proper records. Not only is this a requirement, but it can also help avoid costly mistakes.
Misapplication of charitable funds for personal expenses
The Inquiry revealed a significant mismanagement of the Charity’s finances. The trustees were unable to account for large sums of money, including personal spending from the Charity’s bank account. This included purchases of clothes, food deliveries, and even a luxury watch.
Further investigation uncovered claims of a “loan account” used to justify personal expenditures, but no evidence was provided to verify this. The Inquiry also uncovered that the Charity had been subject to significant debt and County Court judgments which had been left unaddressed since 2018.
Key takeaway: Trustees should set clear and transparent financial controls, including diligent record-keeping, to ensure that funds are applied for their charitable purpose.
Conflicts of interest and private benefit
The Inquiry found that for nearly three years, the mother-and-son trustee duo had been the only trustees of the Charity. As a result, many decisions had been made without the necessary quorum. The Inquiry also uncovered unauthorised trustee benefits, including £96,000 paid from the Charity towards rent for their personal property, as well as utility bills and payments to family members which could not be justified.
Key takeaway: The Charity Commission takes conflicts of interest very seriously. Trustees should be careful to avoid financial arrangements that benefit themselves, or someone connected to them, without proper authorisation and management of the conflict of interest that arises and ensure that clear records are kept.
A reminder to the wider sector
This case is an important reminder that, while the role of a charity trustee can be positive and rewarding, it carries significant responsibilities. Trustees must comply with their legal duties and may face significant consequences if they fail to do so.
In this case, the Inquiry revealed significant mismanagement, including a failure to avoid conflicts of interest and proper application of the Charity’s finances. As a result, the two trustees were both permanently disqualified from acting as trustees, officers, agents or employees for the Charity, and indefinitely disqualified from being trustees or senior managers of any charity.
The case clearly demonstrates the importance of effective internal financial controls, regular financial reporting and the maintenance of proper and detailed financial records.
The Charity Commission recognises the voluntary role of most trustees, and the significant responsibilities associated with the role. Trustees are nevertheless expected to comply with their duties honestly and reasonably and to ensure they act solely in the charity’s best interests.
Keeping informed on the latest Charity Commission guidance, complying with your charity’s governing document and seeking professional advice as needed is a good place to start.
If you have any questions regarding the role and responsibilities of a charity trustee, or any of the issues raised in this article, please contact Samantha Pritchard using [email protected] or 0191 211 7905.