Related parties: are you doing enough to identify conflicts of interest?

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:

  1. Most charities have a year-end process through which they ask Trustees to confirm the organisations that they are linked to and ask for declarations of interest. However, it is not just Trustees that create related party risk. Arguably senior management has more influence on the activities of a charity on a day to day basis, so senior management should also be declaring their interests and related parties. Also don’t forget that this includes close family members too!
  2. Do those involved in this process fully understand what a related party and related party transaction is, so that the information they provide to the charity is complete and accurate? Often many of the named organisations disclosed by Trustees aren’t necessarily related parties in regards to influence, control and power. These returns often focus heavily on entities but not people, and often this aspect is not as fully considered. This includes close family members. If a spouse or child of a member of senior management or a Trustee has a prominent role at a supplier or organisation in receipt of charitable funding, then this could create a related party transaction risk. The charity should consider the provision of training or a reminder briefing to ensure that this is fully understood by all involved. 
  3. Once the charity has a list of related parties, consider whether this is complete. Such completeness procedures might include reviewing the charity’s preferred supplier list or expenditure transaction listings against the related party listings to identify any undisclosed links; a review of staff bank accounts through payroll against supplier bank accounts for any matches; perform a company check on existing related parties to identify all other directorships; review those organisations on the related party list to understand further the other persons or entities that have control or influence. Or the charity could ask Internal Audit to review this area as part of the audit plan.
  4. Related party management should be an ongoing process at the charity, not a year-end process for the purposes of disclosing them and related transactions in the financial statements. Make sure there is a process in place for monitoring the associated risks and for identifying related parties and associated transactions throughout the year. This includes declarations of interest at Board and management meetings, consideration of related party risk within the supplier set up process and when receiving or providing income to other parties.