Related party transactions

In a new report the Charity Commission (CC) has expressed concern that charities are not fully disclosing, in their accounts, details of the transactions they have entered into with related parties.

The Charities SORP requires full disclosure of trustees’ remuneration and expenses along with any other related party transactions that have taken place (or a statement that there were none) in order to provide full transparency of a charity’s activities.

This disclosure is considered so important that where accounts do not include the required disclosures, the UK’s charity regulators require auditors and independent examiners to report the matter as a matter of material significance. The regulators are concerned that a failure to disclose related party transactions could be a sign that a charity is failing to handle a conflict of interest in an appropriate manner.

In order to ensure that your accounts fully disclose all related party transactions it is vital that you understand who the charity’s related parties are, using the SORP’s definition of a related party as a guide, whether transactions have taken place with them or not. We recommend that you maintain and regularly review a register of related parties for this purpose that provides a complete listing of the charity’s related parties and the nature of any transactions that have taken place with them.

This register would need to include details of trustees and their close family. Many trustees have been reluctant to provide this information in the past, particularly where it might involve disclosing the names of minor children. Although in the last majority of cases this will not have resulted in any related party transactions going undisclosed, such a stance is likely to be seen as increasingly unacceptable with the growing demands on trustees to be fully transparent.

Trustees are also reminded that before any transactions are entered into with a related party the possibility of any conflict of interest needs to be declared to the board of trustees. The board can then consider the potential issue before determining whether it is appropriate for the charity to proceed with the proposed transaction. By handling potential conflicts of interest in an appropriate manner trustees can avoid the possibility that their actions may see them reported to their regulator and the potential sanctions that could follow.