Registered Charities are required to report ‘related party’ transactions in their Notes, a provision not well understood. There is nothing ‘bad’ about a related party transaction, but they can have a large impact on an organisation’s financial activities or position, and that’s why they are there.
For example, more than half of an organisation’s income may be derived from donations by Board members. If this organisation was compared to another, which is of similar size and does similar things in similar ways, the donation income of the first would be much higher than that of the other organisation, and a reader might think that latter organisation is not as well supported by their community. The related party disclosure puts this in perspective.
The intention of this disclosure is not to show up conflicts of interest – the Charities Act doesn’t just mandate disclosure of when officers in a charity gain a pecuniary benefit, it forbids it! Having said that, however, it is a fair assumption that Charities Services will sometimes look at this Note for clues that might warrant an investigation.
A ‘related party’ is any officer in a charity (i.e. board or committee member, or others with large influence over decision-making), their spouses, children or parents, or any business such people may have a majority stake in. A related party transaction is any financial transaction, not necessarily in cash, between the organisation and any such persons. A reimbursement for incurred expenses is not a related party transaction, as the transaction is between the organisation and the business where the items were bought – the officer just acted as an intermediary to facilitate the transaction with no personal benefit or cost.
Charities have to disclose such transactions if they are significant in monetary terms, or of they are made under terms that would not have occurred if it wasn’t a related party transaction (such as free labour, large discounts, or the fact that the service was provided in the first place). No names have to be disclosed! Only the relationship needs to be mentioned (‘Board member’, ‘child of committee member’), and similar transactions can be aggregated (i.e. total figure for donations from all board members, rather than each individually). Remember that these are public reports, and not everyone may want to be on record.