Penny Appeal - An Independent Internal Auditor’s Perspective
The following blog was written by independent internal auditor and financial governance advisor, Nasir Rafiq. This was published on Dua Governance website on the 13th April 2023.
Ramadan is an important time for Muslim charities to raise funds. It is estimated that around 35% of the total annual funds can be raised during this period. This is why Muslim charities often start preparing for this month, up to three months before. In 2021, I analysed the top 20 Muslim charities and found that up to £80m was raised by them in this holy month.
As the size of the Muslim charity sector has risen, the donor criticism has also risen. We find this every Ramadan; charities are attacked on social media for either their 100% donations policies, Zakat policies, accounts, or their practices. Although genuine donors have the right to ask questions, the motivation behind these attacks is not always clear.
This year, Penny Appeal has been singled out, raising concerns related to areas that I have personally reviewed as a financial governance professional. I feel obliged to have my say for the sake of the donors who are sometimes put off from donating to charities because of social media allegations on one charity.
The Role of the Charity Commission
The Charity Commission is an active regulator and takes reputation of the charity sector seriously. If one charity is found to be risking reputational damage, it takes direct action. These actions can take various forms, the serious one being a statutory inquiry when the Commission feels the current trustees lack the ability to address the issues noted. Penny Appeal has never been under a statutory inquiry.
The reference included in Penny Appeal’s audited year-end financial statements refers to their ongoing relationship with the regulator where the charity is asked a question and then are required to submit an answer or an action plan to mitigate the issues noted. This is consistent with many Muslim charities specifically and generally in the charity sector.
It is good practice to disclose the interaction with the regulator to assure the donors that the charity works with the regulator to address noted issues, especially in relation to governance and safeguarding.
It is good practice to disclose the interaction with the regulator to assure the donors that the charity works with the regulator to address noted issues, especially in relation to governance and safeguarding. Penny Appeal in its audited accounts chose to disclose this information whereas many charities choose not to. This also depends on the quality of the statutory auditor. A mainstream charity specialist statutory auditor may require this for better understanding of the accounts whereas less experienced auditors may ignore such disclosures.
Payments made to British Muslim TV and other suppliers
Charities are required to disclose their related party transactions in their audited annual accounts. These are transactions between a charity and it trustees or businesses that the trustees own or transactions with their close family members – these are defined in the rules (i.e. Charity SORP).
British Muslim TV is an independent business not owned by any trustee of Penny Appeal therefore does not strictly fall under the related party rules.
British Muslim TV is an independent business not owned by any trustee of Penny Appeal therefore does not strictly fall under the related party rules. However, Penny Appeal in their audited financial statements chose to disclose their relationship with British Muslim TV and other suppliers that have an indirect relationship with companies that a Penny Appeal trustee fully or jointly owns.
At the time Penny Appeal was the only mainstream Muslim charity audited by a Big 4 accountancy firm.
This disclosure when introduced in 2019 was subject to an independent statutory audit by PwC, a Big 4 accountancy firm. At the time Penny Appeal was the only mainstream Muslim charity audited by a Big 4 accountancy firm. If there were concerns around funds embezzlement and money laundering, the independent statutory auditor is obliged to act, have this reflected in the audit opinion and have the matter reported to the regulator. This did not happen, and it was determined that the relation between Penny Appeal and British Muslim TV business and the relationship between British Muslim TV and companies fully or jointly owned by a Penny Appeal trustee was justified. This was also the case with the another supplier as well.
The relationship between Penny Appeal and British Muslim TV, is no different from the commercial relationship that exists between that of many Muslim charities and ethnic and Islamic channels for advertising and appeals.
It can therefore be concluded that the relationship between Penny Appeal and British Muslim TV, is no different from the commercial relationship that exists between that of many Muslim charities and ethnic and Islamic channels for advertising and appeals. I understand that the contractual payments to British Muslim TV are determined in reference to the relevant market rates and independently from the Penny Appeal trustee who fully or jointly owns companies that may earn income from British Muslim TV.
Penny Appeal year-end audited accounts make it clear that no trustee receives any remuneration or such personal benefit direct from the charity.
Penny Appeal should revisit the current arrangement with British Muslim TV to ensure the incorrect perceptions that can be created and potentially exploited are addressed.
Charitable spend and overheads
The latest filed audited statutory year end accounts reflect a 20-month period from 1 May 2020 to 31 Dec 2021. The last 12 months was a shorter period of 8 months due to a change in the year end. This 20-month period represents the following facts:
Combined total income of £44.9m and charitable send of £33m (74% of total income). The support costs were £3.5m (7.9%). The support costs includes around £0.5m spent on governance costs during this period. This reflects the work and action plans in response to the Gambia incident and wider safeguarding and governance work.
Although, the charitable spend is within the norms of the Muslim charity sector, I find the support costs to be high for this period. This could be due to the restructure, additional work on safeguarding and legal costs.
Facilities and building costs
According to the latest filed audited accounts and the disclosure of the analysis of the net assets between funds shows that all the buildings purchased by Penny Appeal are funded through the general reserves.
Although a significant portion of these properties generate rental income, the property portfolio is not spilt to show investment properties and the associated rental income. Its important that the charities ensure the investment property portfolio raises a reasonable return to justify the investment.
It is normal for international relief charities to invest funds in UK properties for use and investments. Many have done so.
It is normal for international relief charities to invest funds in UK properties for use and investment purposes – many have done so. I understand Penny Appeal is already renting their freehold property portfolio to generate significant rental income. The building refurbishment has been done in manner to cater for many additional charitable activities that relate to the local community in Wakefield and beyond, especially in the context of the cost of living crisis and capacity building of the youth and small charities.
Author: Nasir Rafiq is a widely experienced Fellow Chartered Accountant (ICAEW) and a Charity Financial Governance Expert. He is the Managing Partner of Dua Governance, a Charity Governance specialist accountancy firm.
Nasir is the former Finance & Corporate Services Director of Islamic Relief Worldwide where he led and reformed the finance, HR, IT, facilities, and the trading functions.
He holds many senior finance positions within the UK charity sector and continues to advise many charities on financial governance & Internal Audit matters, including Penny Appeal.
MONDAY 17 APR 2023