Establishing a good working relationship with an accountant is crucial for small arts organisations looking to establish a viable business. Clive Lewis explains how to find and support an accountant.
This article considers the relationship between arts organisations and their external accountants or auditors. It doesnt deal with the situation for individual artists the accounting and taxation of artists can be very complex, and Arts Council England (ACE) has an excellent website that includes information on starting a business. Because of the complexities of artists taxation, individual artists would be best advised to employ an external accountant with experience of dealing with artists tax matters.
Charity accounts
Most arts organisations will employ finance staff to record the basic monetary transactions undertaken by the organisation. The difficulties organisations tend to encounter arise in producing annual financial statements. Organisations with charitable status will be required to submit accounts that comply with the 2005 Statement of Recommended Practice (SORP) Accounting and Reporting by Charities. This is a heavily regulated area and requires compliance with UK accounting standards, charity law and the need for fund accounting. Not all external accountants specialise in charity accounting and auditing, so when selecting an external adviser it is vital to establish that they have expertise in this area and to seek references from existing clients.
It is the responsibility of the charity trustees (or board members) the people who control and manage the organisation to ensure that the charity prepares reports on what it has achieved and the annual returns and accounts required by law. The financial statements for each financial year must give a true and fair view of the charitys financial activities and its financial position at the year-end. The trustees must select suitable accounting policies and apply them consistently. They are responsible for keeping accounting records that disclose with reasonable accuracy at any time the financial position of the charity and enable them to ensure that the financial statements comply with the Charities Act. They are also responsible for safeguarding the assets of the charity and taking steps for the prevention of fraud and other irregularities. Trustees are also responsible for solvency and the continuing effectiveness of the charity and preservation of its endowments.
Accountants
These are very demanding requirements made of trustees and, not surprisingly, most seek the help of their external accountants to meet their responsibilities. So, how can the external accountants help?
First, it is important to ensure the organisation has external advisers with experience of similar organisations. To select advisers it is important to interview a number of firms and to choose the firm that can demonstrate experience with other clients in similar organisations.
Second, most arts organisations will maintain their records on computer. External accountants can advise on the most appropriate accounting software. Should the organisation use a standard accounting package or one specifically designed for the needs of charities? The latter will be significantly more expensive, but relying on a standard package almost inevitably means using spreadsheets to convert basic financial information into a format appropriate for SORP-compliant financial reports. Spreadsheets are notoriously subject to error and can be time consuming to construct and maintain. So there are likely to be substantial hidden costs with the standard package alternative. The external accountant should be able to help the organisation evaluate alternatives and recommend a solution.
Policy
Choosing appropriate accounting policies is another area where external advisers can assist the trustees. After the year-end audit is complete, it is usual for the auditors and the trust management to discuss the financial report as well as the accounting policies and procedures adopted by the organisation. Are the systems adequate? What changes in financial reporting standards will be introduced in the next year? How will these affect the accounting records and the data collected? What about the internal control (the system of allocating the duties amongst the staff so that no one person can process a transaction by themselves)? Is it robust enough to prevent fraud or error? Is the information available to the trustees sufficient for them to be able to monitor the organisations effectiveness and continuing solvency?
It is vital that arts organisations have a good working relationship with their external accountant, who can be a significant source of diverse external knowledge. Specialist external accountants frequently produce newsletters and publications relevant to specific sectors, as well as organising events that can assist inexperienced trustees and management to develop an understanding of the relevant issues.
The external accountant should also be a first port of call for advice on cash-flow and financing issues. If the organisation runs into cash-flow problems the external accountant can prepare cash-flow forecasts and help secure additional financing. The accountant can also help if the organisation secures a significant new source of funds and wants a temporary home. The external accountant can help with grant applications. Of course, they are also a source of advice on taxation issues.
Having an external accountant is an inevitable requirement of being in the charity sector, and a step that small organisations which are not should still consider. However, to make the best use of them, it is advisable to keep them informed of the challenges and opportunities facing the organisation and be aware of the wealth of information and advice available from them. Choosing, and getting the best from your external accountant needs some thought and effort, but the returns from that investment make the effort worthwhile.
Clive Lewis is Head of SME Issues at the Institute of Chartered Accountants of England and Wales. t: 020 7920 8100