Changes to the Charity SORP which apply to reporting periods beginning on or after 1 January 2015 mean that governance costs are no longer shown on the face of the statement of financial activities (SOFA).

Instead they must be separately identified within the required analysis of support costs. Charities must understand their costs and allocate them appropriately between their fundraising and charitable activities.

The regulator has published report which focused on charities which reported both governance costs of more than 20% of their total expenditure and also reported total expenditure that was more than 80% of their total income.

The Charity Commission says it used the figure of 20% of expenditure because it produced a manageable sample size consistent with the purpose of the review, but this does not mean this is a benchmark for the maximum amount of governance costs that is acceptable.

On this basis, the regulator identified 76 charities with an annual income of over £500,000 that appeared to have high governance costs according to their returns.

The results suggest that only three charities (4%) had a reasonable explanation for the figures they reported. The vast majority (87%) had incorrectly allocated costs to governance costs that should have been included in other categories of expenditure, including charitable expenditure.

The most common mistake was to equate governance costs with general management and administration costs.

The remaining 9% of charities did not in fact have high governance costs in their accounts and had completed their annual returns incorrectly. A recent commission report found similar errors in completing the annual return in charities which had reported low charitable expenditure.

The Charity Commission says many charities in the sample seemed either not to understand the difference between support costs and governance costs or were not fully aware of the SORP requirements for reporting their expenditure in the SOFA.

Michelle Russell, director of investigations, monitoring and enforcement at the Charity Commission, said: ‘We continue to be concerned that a large number of charities are not meeting the accounting requirements as set out in the SORP and are making basic errors in their annual reporting.

‘The incorrect reporting of financial information causes confusion, has a real impact on public trust and confidence in charities and it is also likely to impact on how they are perceived by donors and potential supporters.’

Russell said it is essential for independent examiners and auditors who may prepare the accounts or may audit/examine accounts to check the basis of cost allocation used to guard against the accounts being materially misstated.

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