The financial regulation of charities should be reformed to prevent the misuse of donations, the Attorney General said yesterday.

Mr Michael McDowell SC said there was a high risk of a "black hole" emerging at a charity, though there was no significant evidence of such a case at present.

Given the introduction in the Finance Act of tax relief for charitable donations, he said the need for significant reform had never been more pressing.

At a meeting of the Not-for-profit Business Association, he said the potential for the loss of funds was like "a timebomb ticking away".

The association was established two years ago to encourage charities working for those with disabilities to develop an entrepreneurial culture. Its chairman, Mr Frank Flannery, said the era of well-intentioned, but essentially amateurish charities was over. Such organisations had provided essential services worth £60 million (€76 million) since 1994.

"We have no right to complain about underfunding from the State's coffers unless we can show the services we provide are relevant to the people who use them and offer value for money to the taxpayer," he said.

Mr McDowell said it was wrong in principle to subject business to regulatory scrutiny, but not charities. He favoured creating a well-organised charity commission to manage the financial accountability and regulation of charities.

He added: "Personally speaking, I believe that a well-thought-out programme of legislative reform in this area is long overdue.

"As holder of a legal office invested with the role of protector of charities, I regard it as a personal obligation to draw the attention of the legislature to the need to put in place a system of laws that protects the integrity of the charitable and benevolent endeavour while at the same time encouraging charitable and altruistic values in society at large."

Mr McDowell said: "Any such legislative reform should be as light-handed as possible while ensuring proper accountability, and should fully acknowledge and endorse the immense contribution that voluntary, benevolent and charitable activity makes to the achievement of social justice and the advancement of human dignity."