Schools get fleeced – and we all watch

The Bureau of Investigative Journalism recently published an article (http://www.thebureauinvestigates.com/2012/09/25/schools-fleeced-by-it-scammers/comment-page-1/#comment-9117) following the exposure on Panorama (BBC 1) that schools in the UK had been “fleeced” by IT companies (“scammers”). The article and Panorama drew attention to schools which are burdened by the need to run themselves as businesses and are often ill-equipped to do so when set against the complicated requirements of funding, procurement, suppliers and the like.

 

The BIJ summed up the problem with the thought that the FMSiS (Financial Management Standard in Schools) had been wrongly abolished and that the Government should think again. It was abolished after it had become a paper ticking exercise as reported by the Government in 2010 in their White Paper – “The Importance of Teaching” – http://www.education.gov.uk/inthenews/inthenews/a0067711/government-announces-end-of-complex-school-financial-reporting-tool.

 

The BIJ article missed the fact that most of the schemes that Panorama reported on were entered into while the FMSiS was in place!

 

Why is Finance so hard for non-profits (public and private sector)?

 

This does not just happen in Schools – it happens wherever greater knowledge is brought to bear.

 

So, the banks have run out of control and, five years’ later, we remain stunned that the financial regulators did not see this coming – or even understand the huge range of sub-prime schemes, poor management controls, over-leveraging, bad morality, lack of risk aversion, inability for banks to fail, dislike of customers and similar.

 

In the same way, companies like Enron fooled their highly paid auditors (some of whom connived with them) – we never learned much from that or from the countless, other financial scams that have been served up on unsuspecting publics since at least the south Sea Bubble in 1720 and for thousands of years before.

 

But, we expect more from public sector and the third sector organisations that supposedly guard our taxes and donations. What makes it so hard for them to adequately ensure that the financial and support arms of those organisations are able to be a good as all those they work with?

 

Where the incentives are

 

Of course, much has been written about how the wealth potential of banks suck in those with the highest intelligence and motivation (and maybe those with the lowest ethics) and that the regulators are filled with those who cannot compete – maybe those who failed to make it in banking themselves.

 

Enron was full of highly motivated and driven people who bought into a scheme (or schemes) and worked like fury to implement their scam / scheme. The manipulation of an energy market was not understood by the regulators and auditors just as auditors and clients failed to understand how Bernie Madoff was making such returns on their “investments”.

 

In a money-driven economy, which has created tremendous wealth for society, there are, at the margins and even more in the centre, incentives provided to people that lure those who are massively motivated and driven to participate – to work 24 hours a day, to spend their time working up schemes to make money and their companies profitable. Business is a money-driven part of the economy in a way that the non-profit sectors (be they public or private sector) are not. The latter are full of people driven (and maybe just as motivated) by other things – a passion for human rights, for education, for people, for society – but not for the thing that drives those they may meet at the interface of private sector and the non-profits.

 

As Galbraith wrote in The Affluent Society, public goods are always at a disadvantage in a market-driven economy and the crucial problems always exist at the interface between the two.  I tackled this is a previous post – https://jeffkaye.wordpress.com/wp-admin/post.php?post=192&action=edit – and the inability of societies to establish how to provide the “social balance” to which Galbraith refers enables the problems to persist – such as the fleecing of schools in the UK.

 

Enabling the “social balance”?

 

The “social balance” (Galbraith ibid) is about how society reacts to private enterprise. The most obvious example is the automobile – private industry propels the development of cars but it is the public sector that provides the roads, traffic control and policing, emergency services and hospitals (usually), pollution control and similar. India is a great and recent example – http://uk.finance.yahoo.com/news/india-car-sales-soar-where-054302682.html. But, the ability of the private sector runs well ahead of the ability of the public sector to react.

 

Nowhere is this lack of social balance clearer than in the provision of expertise in “back office” areas in the public sector and in the third sector. While their front of office capabilities may be excellent, the non-profit sector cannot, in the main, recruit the best people (it cannot offer financial incentives to match anything like the private sector) and therefore its systems and processes fall well behind.

 

This is compounded by the continuous belief by government that they have to “do something” directly (like the FMSiS above) and in the third sector that anything spent outside of front end is a waste of money. Donors (whether governments, trusts and foundations, companies or individuals) suddenly have a different mindset as soon as they donate. How many would ask companies to stop spending on finance operations – yet, many donors insist that their donations can only be applied to front end work – the cause – and nothing to overheads. While it is good to keep overheads low, governance and financial management dictate that these “enabling” areas of any organization (like people management training) are as good as the front end operations so as not to stymie the work of the charity, NGO or pubic sector organization.

 

Having worked in all sectors (with most of my working life in the private sector) it is clear to me that the non-profit sectors are continuously starved of capability and expertise in the areas that could make them far more efficient and capable – not just to survive but also to enable far better work to be accomplished. If they work well it is in spite of the problems put in their way. Most don’t manage and the failures of the public sector to manage large IT projects, for example or the non-profit sector to survive continue.

 

So, how can the non-profits develop a response to the needed social balance so that they don’t get fleeced?

 

Pro-activity in the social balance

 

Governments and those who provide central governance to the non-profit sectors have undertaken so many actions and some have provided stability. But, each sector and those within it are challenged continuously.

 

What is needed is first, recognition that there is a problem. Each sector should assess where the main problems lie and government has to step up and signal that it will not do everything but begin to be the chief enabler for the non-profits. For example, restrictive funding for charities, whereby donors only provide money for front-end purposes, should not be allowed. The practice is akin to shareholders telling companies which part of the business their funding is allowed on. It is not a loan – it is a donation and restrictions mean more bureaucracy and less ability for the charity to manage itself.

 

If a donor believes that a charity spends too much on overheads, it can withhold donations just like a shareholder can invest elsewhere – but restricting funding in this way is counter-productive.

 

In the UK, this is something for the charities Commission and government to act on.

 

Second, there has to be a stepping up on ability – which will lead to improved processes and systems (although improvements in each need money as well and the proposal above is one way of directing more into this area).

 

This stepping up of ability should be driven by government who should require firms of accountants to do what the legal profession does – provide at least 2% pro-bono capability into non-profits. I have been highly impressed by law firms’ ability to do excellent pro-bono – less so by the finance industry.

 

CSR divisions of companies should also be driving their best finance people into non-profits – in a meaningful way to address the social imbalance.

 

Governments should look to reward those who go from the private sector into the public or third sector (even for a time) with tax incentives (much like students having to repay their student loans). It is not a great time to do this, but it would indicate a lot.

 

Third, the big accounting organisations should ensure that they focus more attention on public sector and third sector – understanding the problems and devising exams and maybe alternative paths to accreditation rather than the one-size-fits-all approach. Certainly, the CIPFA and IPSASB provide the basics for the public sector but the incentivisation for the best to go into that sector let alone education or charities / NGO’s is far less and the number of accountants that enter the charity sector (for example) with the same skill levels and drive as those in the private sector is small.

 

Fourth, trustees from private sector organisations have to become involved – not just from a governance standpoint but setting examples and putting the bar as high as it needs to go to make the enablers work. This is hands-on stuff not just remote governance.

 

Separate sectors, common interests

 

Except in a society where the three sectors don’t exist (e.g. communist states), the challenge is greatest at the intersections of society – where the sectors clash. Yet, as in the example of automobiles above (or any other transportation systems), different sectors live off each other – and the charity sector fills many of the gaps that society does not see fit to fill in private or public sectors.

 

The sectors need to be different, of course, but there does need to be a far better understanding of the problems that our economic structures throw up and how to deal with them or fleecing of our schools will recur but be seen to be a mere tip of the social iceberg.

 

 

 

 

Do we Value the Charitable Sector?

As the Coalition Government slips worryingly through its third year, the value given to the Third Sector (or the Civil Society) is more uncertain. The Big Society is being challenged as it has not been for many years through financial austerity in national and local government. This has had a dramatic impact on charities in the UK that have been set up to serve the community and who rely on government (national and local) income. In Osborne’s last budget, charitable giving has been hit hard by limiting that which is tax allowable to £50,000 in any one year for individuals.

The charitable sector is strong in the UK, but threatened by this reduced government spending, reduced spending by companies and potential reductions in individual giving as we tumble back into recession.

The variety of charities is vast – from those set up to further medical research, those working to improve health and welfare, those set up to do international development, social clubs and societies, sports clubs and a host of others. Even schools are charities under UK law. This makes it hard to understand the role they have in society.

However, they stand alongside the Governing sector (government) and the products and services sector (business) and the fourth sector or fourth estate – journalism. Maybe that’s also where many NGO’s lie these days – funded to do investigations into society as newspapers once were. The fourth estate now contains many NGO’s – the likes of ONE, Enough, Global Witness, parts of Greenpeace, Oxfam, Save the Children, Amnesty and many others – where charitable work continues alongside the investigations and journalism and lobbying.

The Charitable Sector – Filling the (Massive) Gap

The role of charities is therefore complex – even if in the minds of most funders it is primarily to provide help to those sectors of society that are left out by the State and by the remainder of civil society. Charities exist to drive funds and assistance locally, regionally, nationally and internationally where it is deemed that government does not, cannot or will not.

Whether it is DEC (Disasters Emergency Committee) or similar assisting in emergency international funding, or Oxfam or Save the Children, or local hospices, each has been set up by individuals who saw a gap in care and raced to fix the problem. The whole area of social business has also sprung up in between business and charities. The roles are evolving as niches appear where need is believed to occur – it is a complex and adaptive system that is constantly evolving.

Each society is developing its own way from the bottom up – very few governments are sufficiently totalitarian to impose its blueprint on its people. In North Korea, this may be so but elsewhere government and business leave gaps that the market cannot satisfy and that civil society attempts to fill.

If the role of the charity sector (outside of the fourth estate incumbents) is to fill the gaps that business and government leaves – because they identify the need first, provide funding that is otherwise unattainable, provide better expertise, more focused concern or whatever other motivation – then how should society be developing to maximize its positive effectiveness? While this note focuses on the UK, it is as relevant to the international community.

Valuing the Charitable Sector

 

It is now time that government in the UK (and elsewhere) took a long, hard look at the charity sector and saw it as a real sector of the economy. The last budget was a good example of how taxation and benefits were structured towards businesses and individuals and where civil society (or the Third Sector) was seen as a peripheral activity. This was a slight on that sector.

The seemingly thoughtless and throw-away issues such as the limit of £50,000 on tax-free giving was typical of government not seeing the organized part of civil society as being defined in any special way. It is surely time that civil society – the charitable sector – is defined as separate from the business and individual taxed community and that we establish a set of income and expenditure statements from government that shows clearly how well or badly we are doing in that sector – at least in money terms. This would then clearly show how well or badly governments are also doing.

At the time when the Natural Capital Committee under the newly appointed Dieter Helm is calling for an accounting for natural resources / natural capital, it is time for the charitable sector to be similarly “valued”.

Impact Valuations – What does this mean?

On a basic level, an understanding of the tax taken from the sector (mainly through VAT, plus income tax and national insurance – both company and individual – paid to staff) should be provided annually at least by Government – maybe the office for National Statistics. That can be set against the tax benefits that may arise through gift-aid benefits for those who provide funds to charities. At the very least, an Annual Report should be made by Government (almost a CSR report) but verified and commented on by Charities Commission and maybe more independently-minded organisations). This would be completely different to the current Charities Commission Annual Report – which is a micro-analysis of how it spends its £29.4m. The report has to be a macro-economic one.

Stage two would be an analysis of the sector’s public “goods” – a value of the huge and positive impact that charities have in the UK and internationally. This will be its “Impact” at a macro-economic level.

If natural assets can be “valued” (providing an accounting value as Dieter Helm wants), then so can charitable activities. This is being demanded by many funders before (certainly trusts and foundations) before they fund charities, while individual givers often want to know more about an individual charity beyond the “gut-feel” instinct that propels them to give.

This macro-economic valuing would give the charity sector an independence. It would mean that civil society could begin to understand just what contribution the charitable sector provides in terms that begin to be understandable.  Nick Hurd, the Minister for Civil Society, would have a far more meaningful brief. Currently, he sits in the Cabinet Office (under Francis Maude) – but, the brief is very wide and less economically focused than it should be. The key, of course, is how we go beyond pure economic modeling (our GDP of quantity not quality) to measure the benefits we receive from natural capital / assets (which the NCC is set up to assist with) and from civil society itself.

Just as the value of education is not the money that the government spends on education per head (based on the Academy where I am Chair, £9.35m of income is spent on 1450 students – a “value” of £6,448 per annum – although at least this has some calculative affect. Even here, of course, the cost is reduced by the government’s take of income tax from staff, National insurance from staff and schools), so the value of charities should be assessed and the (often adverse, sometimes positive) impact of government intervention should be made known.

This is not a simple task, but a critical one. As we enter a world of real austerity (especially in Europe), we are underestimating the cost of cost savings on society – at best, we ignore them.

We are well into the 21st Century – time we thought in 21st Century terms and valued those things that materially contribute. The NCC may be making a start with natural capital: it is a good time to start making real progress on valuing the macro-economic benefits of our charitable sector – before it is too late.