Mr Diarmuid McDonnell and Dr Alasdair Rutherford — Written evidence (CHA0023)
Submission to the Select Committee on Charities’ call for evidence
Dr Alasdair Rutherford, Senior Lecturer in Social Statistics
Faculty of Social Sciences, University of Stirling
Diarmuid McDonnell, Doctoral Researcher
Faculty of Social Sciences, University of Stirling
Overview
1. Our research group, based in the Faculty of Social Sciences at the University of Stirling, has conducted work modelling charity risk using administrative data from the Office of the Scottish Charity Regulator (OSCR). The aim of this submission is to present evidence from our research examining the nature, extent and determinants of charity misconduct and accountability in Scotland. In doing so we address questions 2, 6 and 10 in the Call for Evidence and provide much-needed empirical analysis on a contentious topic. We begin with an outline of the fundamentals of risk-based regulation, followed by our research findings. We conclude with a number of policy recommendations relevant to the challenges facing the Charity Commission and the wider UK charity sector.
Background
2. Concerns have long been raised about the accountability and conduct of charities, particularly the adequacy of current reporting and oversight mechanisms (Acar, Guo & Yang, 2008; Saxton & Guo, 2011). A core objective of the Charity Commission’s Strategic Plan 2015-2018 is to “become a risk-based regulator focussed primarily on enforcement and prevention.” (Charity Commission, 2015, pp. 1). Consequently, the Commission is opening increasing numbers of statutory inquiries into cases of alleged charity misconduct.
3. Among the panoply of concerns, various stakeholders have questioned the amount spent by these organisations on their charitable activities, the provision of private benefit to trustees and senior management, and the manner in which charities raise their funds (Charity Commission, 2016). These misgivings are particularly salient in an era of increasing public scrutiny and accountability of institutions in general (Power, 2009; Rothstein, Huber & Gaskell, 2006). Consequently, charities and those tasked with their oversight are under increasing pressure to demonstrate their legitimacy and sustain and enhance public confidence in the sector.
4. Uncertainty is inherent to most regulatory endeavours. It can stem from the sector subject to regulation, imperfect or incomplete information and shifting public attitudes. As a response to this uncertainty, regulators in many sectors – such as nuclear power, road safety, occupational hazards and civil society – are increasingly adopting what is known as risk-based regulation. It is defined as a particular strategy or set of strategies that regulators use to target their resources at those sites and activities that present threats to their ability to achieve their objectives (Black & Baldwin, 2012). Risk-based regulation is championed as an “apparently rational, objective, and transparent way of deploying limited regulatory resources.” (Hutter, 2006, pp. 216-217) It offers insulation from claims of subjective or emotional responses to events by regulators, and the potential of a more equitable distribution of regulatory burden.
Our Research Work
5. Drawing upon OSCR’s administrative records for all Scottish charities in the period 2006-2014, we developed models to explain two dimensions of charity misconduct: regulatory inquiries and resulting action. There have been 2,109 regulatory inquiries of 1,566 Scottish charities over the period, with 13 percent of these inquires leading to regulatory action being taken (e.g. suspension of trustees). Members of the public are most likely to raise a concern and thus trigger an inquiry, while the most common concerns relate to general governance and misappropriation of assets. Our results demonstrate that large charities (Income of £10m +), those that carry out activities themselves, and those that do not have parent organisations are more likely to trigger an inquiry; the age of the organisation is, perhaps surprisingly, not associated with this outcome. With regards to regulatory action, it appears that the largest charities are less likely to be subject to regulatory action, as are those with parent organisations. Despite being most likely to raise a concern with OSCR, members of the public are worse at spotting actual misconduct than other stakeholders (e.g. trustees, auditors).
6. Our results suggest that there are clear patterns in the types of charities subject to complaints about their conduct and, to a lesser extent, in the use of regulatory action by OSCR. There are two implications of this work relevant to the Parliamentary Inquiry. First, most concerns regarding misconduct are ill founded or minor and serious wrongdoing can be difficult to identify: in essence, there is a large degree of “noise” (complaints) obscuring the “signal” (misconduct). Second, the disconnect between the types of charities triggering complaints and those engaging in misconduct presents a significant challenge to regulators in how they promote public confidence and trust in the sector.
7. Our second body of work is focused on accountability concerns. Drawing upon OSCR’s administrative records for all Scottish charities with annual gross income of at least £250,000 in the period 2006-2013, we examined the relevance and effectiveness of OSCR’s financial exceptions monitoring programme. The intention of this programme is to establish standards and identify vulnerabilities (e.g. errors, transgressions and risks) in the financial reporting practices and health of charities. The exceptions monitored represent certain accountability concerns, and in particular reflect OSCR’s initial and continuing focus on fundraising, governance and compliance with regulation. The results of our analysis reveal that a majority of these larger charities (61%) trigger accountability concerns and a minority do so persistently. The most common financial exceptions are related to the possible failure to apply funds for charitable purposes, followed by poor liquidity, low reserves, and threats to viability. Our most surprising finding is that none of the 32 financial exceptions monitored over this period were associated with negative organisational outcomes such as late submission of accounts (non-compliance) triggering statutory inquiries, regulatory action or removal from the Scottish Charity Register.
8. There are two implications of this work relevant to the Parliamentary Inquiry. First, the selection of which concerns to monitor should be driven by two factors: concerns that are strongly associated with organisational demise or dissolution; and those that are most strongly correlated with public trust and confidence. Second, regulators should, at the very least, consider publishing their analyses of these accountability concerns, thereby reassuring the public that they are vigilant and that there is (often) nothing to be concerned about.
Recommendations
9. Recommendation One – Regulators should publish more detailed, accessible information and guidance on misconduct and other concerns in the sector. The Charity Commission and OSCR already engage in this activity to some extent by publishing inquiry reports and statistics but there are a number of areas that should be improved. First, the Commission should enhance its public profile so that it captures greater numbers of complaints: there is evidence that levels of awareness of charity regulators in the UK are not high and thus there is almost certainly missing data on misconduct (Hogg, 2016; OSCR, 2016). Second, better guidance on what constitutes serious wrongdoing should be developed in order for stakeholders to better identify matters worthy of reporting to the Commission. Third, the reports and figures that are currently published provide little or no narrative on the implications of regulatory monitoring of misconduct, and often fail to place this activity in the wider context of public trust and confidence in the sector. The Commission should clearly communicate the compartmentalised nature of misconduct in the sector, thereby helping to insulate low risk charities from being afflicted by the general reputational damage caused by the minority accused of misconduct. Adopting this recommendation can address a longstanding concern in the provision of performance information about charities: the inaccessibility – both logistically and cognitively – of this information for key stakeholders (Britton, 2008; Connolly, Hyndman & McConville, 2013; Keating & Frumkin, 2003; Philips, 2013).
10. Recommendation Two – Regulators should engage with charities on a systematic, regular basis to address issues surrounding misconduct, accountability and public trust. The risks that charities experience may differ – in nature and extent – to those identified by regulators through their monitoring activities. The Commission should engage in knowledge exchange activities with charities in order to address this disconnect. For example, it could develop guidance based on analysis of statutory inquiries that could be used by charities to be proactive and deal with complaints themselves; this could also be done for data relating to accountability concerns. This would allow charities to adapt their governance and reporting practices in response to specific and sector-wide concerns. As Acar et al. (2008, pp. 13) surmise: “accountability as a marker sets the stage for accountability as a modifier.” The Commission could also learn about novel and emerging risks afflicting charities by collecting data in the form of periodic sector surveys, focus groups and from other sources (e.g. media reports, other regulators).
11. Recommendation Three – Regulators should do more to communicate the achievement of public benefit by charities. This involves leveraging or collecting data on the impact of charities on society. While this is foremost the responsibility of charities themselves, the Commission should provide individual and aggregate-level data on performance that goes beyond the provision of financial information. One such source is the Trustee Annual Report submitted by charities. Adopting this recommendation would enable regulators to counter misconduct and accountability concerns by placing them in a wider context of the impact of charities.
12. Recommendation Four – Regulators should collaborate and share data with researchers to further our understanding of the sector. Our research has been possible due to the extensive data on organisations, complaints and investigations made available to us by OSCR. Increasing the openness and availability of administrative data on charity regulation would encourage research in this area and directly inform the understanding of risk and accountability in the sector. For example, at a time when OSCR has embarked on a new proactive and preventative approach similar in style and substance to the Commission’s strategic objective to become a risk-based regulator, our research has been of considerable value in two main aspects: supporting the development of regulatory approaches that better address society’s questions about the modern charity and encourage public trust and confidence; and improving the quality and utility of OSCR’s administrative data. There are also opportunities to link administrative data on charities to other data sources, including data held by other regulators: such approaches are well established in this area and social science research more broadly thanks to initiatives such as the Scottish Network for Third Sector Data (http://www.thinkdata.org.uk/) and the Administrative Data Research Network (https://adrn.ac.uk/).
References
Acar, M., Guo, C., & Yang, K. (2008). Accountability When Hierarchical Authority is Absent: Views from Public-Private Partnership Practitioners. The American Review of Public Administration, 38(1), 3-23.
Black, J., & Baldwin, R. (2012). When risk-based regulation aims low: Approaches and challenges. Regulation & Governance, 6(1), 2-22.
Britton, R. (2008). Making disclosure regulation work in the nonprofit sector. University of Illinois Law Review, 2008(1), 437-458.
Charity Commission (2015). Strategic Plan 2015-18: Giving the public confidence in charities. London: Author.
Charity Commission. (2016). Public trust and confidence in charities (Research Report). London: Author.
Connolly, C., Hyndman, N., & McConville, D. (2013). Conversion Ratios, Efficiency and Obfuscation: A Study of the Impact of Changed UK Charity Accounting Requirements on External Stakeholders. Voluntas, 24(3), 785-804.
Hogg, E. (2016). What regulation, Who Pays? Public Opinion and Charity Regulation (Research Report). London : Charity Finance Group.
Hutter, B. (2006). Risk, Regulation, and Management. In P. Taylor-Gooby & J. O. Zinn (Eds). Risk in Social Science (pp. 216-217). Oxford: Oxford University Press.
Keating, E. K., & Frumkin, P. (2003). Reengineering Nonprofit Financial Accountability: Toward a More Reliable Foundation for Regulation. Public Administration Review, 63(1), 3-15.
Phillips, S. D. (2013). Shining Light on Charities or Looking in the Wrong Place? Regulation-by-Transparency in Canada. Voluntas, 24(3), 881-905.
Power, M. (2009). The risk management of nothing. Accounting, Organizations and Society, 34(6), 849-855.
Rothstein, H., Huber, M., & Gaskell, G. (2006). A theory of risk colonization: The spiralling regulatory logics of societal and institutional risk. Economy and Society, 35(1), 91-112.
Saxton, G. D., & Guo, C. (2011). Accountability Online: Understanding the Web-Based Accountability Practices of Nonprofit Organizations. Nonprofit and Voluntary Sector Quarterly, 40(2), 270-295.
Scottish Charity Regulator. (2016). Charities, Public Trust and Regulation 2016 (Research Report). Dundee: Author.
24 August 2016