Thursday, June 17, 2010

Revised Charity Commission guidance on finance, risk and black swans

Last week the Charity Commission published four updated sets of financial guidance for charities. The documents cover risk management; financial difficulties and insolvency; reserves and internal financial controls.

The Commission says that the guidance has been revised to reflect new developments and the challenging economic climate that charities now face.

The updates include guidance on controls over internet banking and safeguards against fraud and financial crime (Internal Financial Controls) and a checklist of key questions for trustees to establish their charity’s financial position (Financial Difficulties and Insolvency).

Interestingly the Commission is warning charities to beware black swans – i.e. the high-impact, hard-to-predict and rare events spotted in Nassim Nicholas Taleb’s book.

The Commission notes (Charities and Risk Management):

If an organisation is vulnerable to a risk that potentially might have an extremely high impact on its operations, it should be considered and evaluated regardless of how remote the likelihood of its happening appears to be. Charities need to find a balance and they will need to weigh the nature of the risk and its impact alongside its likelihood of occurrence. With limited resources, the risks and the benefits or rewards from the activity concerned will need to be considered. It is important to bear in mind that on rare occasions improbable events do occur with devastating effect, at other times probable events do not happen.

Of course, the trickiest aspect of black swans is knowing what they are. High-impact and low-probability risks are often off the radar. Nevertheless rigorous risk management helps: the organisation with contingency plans for staff absence arising from pandemic flu will be more resilient when coping with absences due to volcanic ash grounding Europe.

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