The press is increasingly interested in stories related to conflicts of interest and related parties (proven or perceived) and as the stories often involve high profile figures, if these allegations are found to be true and those persons or entities are linked to your charity, the damage to your reputation could be enormous. It could also trigger other consequences that create financial risk too, with regard to tax and substantial donor rules. In addition, recent instances of fraud identified within the sector have often had links to related parties.
The public’s perception of a charity and its moral and ethical behaviour is critical to its reputation and ability to fundraise successfully. As such the charity needs to ensure that it has controls in place to mitigate illegal and immoral practice, ensure compliance with procurement rules and avoid situations that create a conflict of interest. There is a significant reputation risk for charity if a Trustee or member of management is influencing the charity to use a related party company or person to perform work on behalf of the charity in a non –arm’s length arrangement.
It is the responsibility of the charity to identify and disclose related parties and related party transactions and implement adequate accounting and internal control systems so that related party transactions are appropriately identified. For many charities, the identification and management of related parties is not currently an area of strength and we believe organisations should be doing more to ensure that they have produced and then maintained a comprehensive list of related parties as well as having appropriate procedures in place for their identification.
Management should also ensure that the charity has designed and implemented appropriate procedures to ensure that associated transactions linked to these parties are identified, understood and disclosed, including procedures to ensure that the list of related parties and transactions are complete. Management should also consider the risk linked to related parties in other processes within the organisation such as procurement, grant giving and contract management.
Four steps to better related party management: