Trustees are under a strict duty to ensure the safety, proper use and accountability of their charity’s money. This will be the case even where trustees have engaged a third party to manage finances. It is of paramount importance therefore that trustees seek to avoid any financial irregularities in their charity’s accounts to uphold public trust and confidence in their charity and the wider charity sector.
Mismanaging charity money may cause financial irregularities and may result in detrimental impact to a charity’s financial position and the quality of the services that it is able to provide, as well as causing lasting reputational damage.
The Charity Commission stresses the importance of ensuring that charity money is only used in accordance with the charity’s governing documents and its policies. Where charity money is not used for such purposes, trustees will be responsible for putting measures in place to rectify this.
Internal financial controls for charities
The Commission urges charities to ensure that they implement robust internal financial controls and procedures to ensure that charity assets, including money and property are protected. This will also allow trustees to make confident decisions regarding the financial position of the charity and will ensure that trustees are compliant with their legal duties surrounding charity finances.
Charities should ensure that stringent internal financial controls are in place and are accessible to all trustees so that they are applied consistently and accurately.
Charities should consider factors such as the size of their charity, and the type and value of the assets protected when deciding which financial controls should be implemented. This decision should be made collaboratively, involving all trustees, this will ensure that the internal controls are best suited to the needs of the charity but will also keep all trustees informed as to the measures in place to ensure best practice. Charity Commission guidance on effective decision making in such cases can be found here.
Internal controls should be regularly monitored and reviewed to ensure that they continue to serve the best interests of the charity. The Charity Commission recommend that this is carried out annually or following a significant financial loss or incident. Regular monitoring will also act to assist trustees in remaining aware of their charity’s policies and processes.
Accurate financial records and reports
To adequately understand a charity’s financial position, all trustees should have access to accurate and up-to-date financial information. This will include providing new trustees with copies of the latest accounts, and the charity’s governing document as well as the latest management accounts and Commission guidance on public benefit when they are appointed.
It is the case that trustees have a legal duty to keep accounting records for their charity, all charities must prepare annual accounts. To ensure that accounts and records are kept accurately and efficiently, trustees can elect third parties to manage financial records and reports.
Information accessible to trustees typically includes the latest management accounts, these typically report performance against budget and may include forecasts for future financial performance. Trustees may also wish to have details of current cash flow and account balances.
Accurate records and periodic reviews of them will assist trustees to swiftly identify if their charity is in financial difficulty and will allow for swift protection of beneficiaries in such cases. Where there has been a significant financial incident or loss, trustees should ensure that they retain records of how this was responded to and how internal financial controls were updated in response.
If you have any questions about the topics raised in this article, please do get in touch with our expert Charity sector team.