Should it be disclosed by Irish charities?
The Irish charity sector has faced significant challenges and media interest since December 2013 with ongoing Public Accounts Committee enquiries. The primary concern for charities has always been that damage to one charity’s reputation could have a devastating impact on all charities.
Reputational risk is top of the risk register for all charities and unfortunately the issues highlighted recently taint the reputation of all charities irrespective of the governance within those charities.
As a service provider to the not for profit sector, currently one of the key recurring questions by those charged with governance for charities, usually volunteer directors, is “what is our obligation to disclose CEO remuneration?”
In considering disclosure of CEO remuneration, matters that need to be addressed are current legislative requirements, the Charities Act, the position of current and future accounting standards, and the ethos of the charity.
What is an incorporated charity’s obligation to disclose CEO salary?
First and foremost section 191 of the Companies Act 1963 requires disclosures in the financial statements of the aggregate amount of directors’ emoluments. This includes services as a director of the company or as director of any subsidiary thereof or otherwise in connection with the management of the affairs of the company or any subsidiary thereof and shall distinguish between emoluments in respect of services as director, whether of the company or of its subsidiary, and other emoluments. It also applies to directors’ or past-directors’ pensions and any compensation to directors or past-directors in respect of loss of office.
There is no reference under current Irish company legislation to CEO remuneration disclosure and therefore the disclosure of CEO remuneration where the CEO is not a director is not required. It should be noted that it is often stipulated by Revenue in granting charitable exemption that the Memorandum and Articles of most charities preclude directors of charities from receiving remuneration.
Will the Charities Act change this?
The Charities Act, 2009 was drawn up to address the governance of all charities, both incorporated and unincorporated. However whilst the Act has been enacted, it has not been commenced with the exception of two small sections. The Charities Act, 2009, is silent on the format of financial reporting and therefore until the Charities Regulator is in place and issues formal guidelines on financial reporting and disclosure requirements, only incorporated charities have definitive disclosure requirements. For all other unincorporated charities, certain disclosure requirements are either required under their own rules or those charged with governance choose to adopt transparent disclosures.
Is there a reporting requirement under Irish Generally Accepted Accounting Practice (GAAP) for CEO disclosure in charity accounts?
One might consider the disclosure requirements of Financial Reporting Standard 8, Related Party Disclosures relating to key management personnel such as the CEO. Under FRS 8 a party is related to an entity if the party is a member of key management personnel of the entity or its parent. FRS 8 applies to all entities intended to give a true and fair view. The standard however specifically excludes from its disclosure framework “emoluments in respect of services as an employee of the reporting entity”.
Will the new Irish GAAP, Financial Reporting Standard 102 (‘FRS102’), for implementation in 2015 (including 2014 comparatives) change the current disclosure requirement?
FRS102 defines key management as ‘those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity. Compensation includes all employee benefits in exchange for services rendered to the entity.
The disclosure requirement is that an entity shall disclose key management personnel compensation in total. Again there is no reporting requirement to single out the disclosure of CEO remuneration. The definition of key management personnel as outlined above could include the CEO, CFO, Head of Fundraising, Head of Advocacy, Head of Services, etc. depending on the charity involved. As the figure is cumulative, this may provide an average figure for those most likely earning the higher salaries. However the range of salaries among key management cumulatively grouped could disguise the true level of the person on the highest compensation.
If a charity applies the Statement of Recommended Practice for Charities (‘SORP’), is there a requirement to disclose CEO salary?
The Charities SORP is legally required in the UK but it is only recommended practice in Ireland. The SORP requires disclosure in the annual financial statements of the number of employees whose emoluments for the year (including BIK but not employer pension costs) fall within each band of STG£10,000 from STG£60,000 upwards. A number of Irish charities which apply the SORP in the preparation of financial statements adopt these disclosure requirements. In Ireland a band of €70,000 upwards is commonly used, although not always. However there is no requirement under the current recommended SORP to separately disclose the CEO salary albeit this may be transparent in the band disclosure.
What changes does the SORP exposure draft consider?
There is a SORP exposure draft for charities which closed for consultation in November 2013. The revised SORP is to align with FRS102 and would only be recommended practice in Ireland. It is not surprising therefore that the revised SORP requires disclosure of remuneration and benefits received by key management personnel. It states that those charities reporting under FRS 102 must also disclose the total amount of employee benefits received by its key management personnel for their services to the charity. It has maintained the band disclosure requirement for larger charities. However, it also states that charities may disclose the amount paid to senior management personnel on an individual basis but again the term ‘may’ allows for non-disclosure.
What other areas should be considered?
Those charged with governance should consider funding or service level agreements, the Data Protection Act 1998 and 2003, privacy law and the employment contract of the CEO concerned. Some organisations such as Dóchas include a requirement in their Code of Corporate Governance for Irish Development NGOs that CEO remuneration be openly disclosed in the organisation’s accounts. Other codes may adopt similar disclosure requirements.
In conclusion, there is no legal or accounting requirement to disclose the CEO remuneration. However in the interest of transparency and donor expectation, one should consider more than simply legal obligations. There is an obligation on charities to provide assurance that the charity is operating in the interest of the stakeholders and not for private benefit. Disclosure of the CEO salary would not in itself demonstrate this and may be a disclosure or media issue which is deflecting from the pertinent questions which stakeholders such as donors or funders (including the public for state funded organisations) should be asking.
As a stakeholder when you consider the annual report and accounts and/or information on charity websites, do you have enough information to understand the aims and objectives of the charity, the resources available to it and how these resources have been used? Does the charity disclose and demonstrate what has been achieved as a result of its activities? Does the charity comply with voluntary codes such as The Governance Code for Community, Voluntary and Charitable Organisations or the Statement of Guiding Principles for Fundraising? Transparency is critical to maintaining, and in some cases regaining, trust and confidence in the charity sector.