The Regulator for Charities in England and Wales
(Version December 2003)
1. This guidance sets out the basic internal financial controls which trustees need to consider. It is expressed in terms appropriate for small charities which are not companies. The same principles apply to smaller charitable companies. This guidance can also form a framework for larger charities to consider their controls.
2. This guidance does not aim to be an exhaustive list of controls and we recognise that not all the controls mentioned will be applicable in every type of charity. We recommend that every trustee reads this guidance in conjunction with our guidance The Essential Trustee: What you need to know (CC3) and The Hallmarks of an Effective Charity (CC60).
3. It is the fundamental duty of all charity trustees to protect the property of their charity and to secure its application for the objects of the charity. In order to discharge this duty it is essential that there are adequate internal financial controls over the charity’s assets and their use. This guidance has been produced to help trustees secure the protection of property under their charge, to advise them of the best practices to employ, and to assist in promoting greater professionalism in charity management. This advice has been based firstly on our experience of charities and the most common ways in which they run into difficulties, and secondly on the actual experience of those running charities.
4. Controls are a necessary feature of any well-run organisation. Because of the special characteristics of the charitable sector, they play an essential part in helping to show potential donors and beneficiaries that a charity’s property is safeguarded, and that its management is efficient. A prime objective of this guidance is to promote the ability of charities to improve their safeguards, and thereby promote the effectiveness of, and confidence in, the charitable sector as a whole.
5. The guidance given here does not remove the need for trustees to seek appropriate professional advice where this is required. This publication cannot hope to cover every eventuality and there may well be instances where trustees may need to approach us for further guidance. The telephone number and address for Charity Commission Direct can be found under Getting In Touch.
6. In this guidance:
Budget means an estimate of future incoming funds, expenditure and other applications of funds for a particular accounting period.
Trustees means charity trustees. Charity trustees are the people who, under the charity’s governing document, are responsible for "the general control and management of the administration of a charity" (section 97 of the Charities Act 1993). You would, therefore, be a trustee if you are:
Current assets includes cash, bank and building society deposits, consumable stocks, trading stocks, debtors and prepayments or any other amounts receivable in the short term.
Fixed assets includes land, buildings, vehicles and equipment and investments held on a continuing basis.
Governing document means any document which sets out the charity’s purposes and, usually, how it is to be administered. It may be a trust deed, constitution, conveyance, will, memorandum and articles of association, Royal Charter or Scheme of the Commission.
Independent examiner means a person independent of the trustees who is reasonably believed to have the requisite ability and practical experience to carry out a competent examination of the charity’s accounts.
Auditor means a person eligible under section 25 of the Companies Act 1989 to audit the accounts of companies (ie a registered auditor), or, in the case of an audit which is required by the governing document of a charity rather than by the Charities Act 1993, as amended by the Charities Act 2006, or the Companies Act 1985, a person qualified to conduct the audit.
Must or need to are used to refer to actions that trustees, or their agents or employees, have to take by law.
Where we use such terms as the trustees should or we suggest, recommend or advise, we are referring to actions which the trustees, their agents or employees could take and which we consider to be good practice, but which are not legal requirements.
7. It is sometimes argued by trustees that charities should not be required to put positive systems of control into place because they are able to operate on trust alone. While this may be the ideal situation, it is not realistic. Charities are unusual organisations, in that they are managed for the beneficiaries of that charity, rather than for the benefit of shareholders/members. It is advisable therefore that trustees be able to show to both donors and beneficiaries that the property is safe. Without the ability to show that checks and controls have been implemented it would not be possible to offer that security.
8. It is important to remember that while the vast majority of people are honest, all organisations need to take steps to avoid putting people in situations where they might be tempted to defraud. Also, if a charity fails to issue proper guidelines, individuals may, out of ignorance, act in a way which damages the reputation of the charity (eg by not separating charity funds from their own).
9. Experience has shown that the implementation of internal financial controls is something which is welcomed by all concerned. The controls act to protect the interests of the beneficiaries of the charity, its employees, and indeed the trustees themselves (who are thereby protected from any charge of neglecting their duty of protecting the charity’s funds).
10. The fundamental responsibility for control of the charity’s activities and funds is that of the trustees themselves. It is therefore crucial that where the trustees administer the charity personally, they will need proper segregation of duties among themselves, so that no one trustee is over-burdened or is given too much authority. However, where the trustees delegate administrative duties to staff or agents, additional controls then become necessary in order to ensure the delegated duties are being properly discharged.
11. Before discussing the various controls which we expect to be in place, trustees may like to be reminded of their duties with regard to charity accounts.
12. All internal control systems need to be based on a recognised plan of the charity’s structure which clearly shows:
13. A good control system will cover all of the individual elements of the charity’s financial administration. If the size of the charity prevents any particular control being implemented, the trustees will have to ensure that compensatory controls are in place. In the case of smaller charities who may not find it possible, for instance, to segregate duties, the control function exercised by the trustee body becomes of even greater importance.
14. No system of controls, however elaborate, can guarantee that a charity will be totally protected against abuse. Trustees often express concern about the extent of their personal liability in the event of any loss to the charity through misappropriation or misapplication of its funds. Having sufficiently rigorous controls provides not only protection for the charity property but also the best defence against a charge of failing to protect the charity’s funds and thereby being in breach of trust. If funds are lost through trustees neglecting their duty of care they could be held personally liable to repay to the charity the funds lost. However, if reasonable controls are in place then trustees are unlikely to find themselves in the position of having to make good any such loss.
15. Generally speaking, charity trustees have a duty to ensure that all property of the charity is brought under their joint control as soon as is reasonably practicable, and that it remains under their joint control, until it is applied for the purposes of the charity. This guidance is designed to explain how this duty might best be discharged in practice. But this does not mean that every single step has to be taken by the trustees themselves. Where a charity is of such a size that the trustees consider it impracticable for them to undertake personally some of the checks and controls mentioned in this guidance, they may consider the possibility of delegating certain of these tasks, say to specific key employees. Where the trustees make a conscious decision to delegate they are required to ensure that the delegation is authorised either by the charity’s governing document, or by section 11 of the Trustee Act 2000.
16. The power of delegation on which trustees rely may impose conditions which need to be followed by the trustees when using the power, but, at the least, we would recommend that:
17. Even where a control function has been properly delegated, trustees should ensure that systems and procedures are in place to enable them to check that the necessary controls are in force and functioning correctly. Trustees have a legal duty to exercise such care and skill as is reasonable in the circumstances when selecting a delegate, and when determining the terms on which the delegate is to act. They also:
18. Trustees have a duty to exercise such care and skill as is reasonable in the circumstances when discharging these review duties. If they fail to exercise reasonable care and skill when appointing delegates and reviewing their performance they may be personally liable for losses resulting to the charity from the acts of the delegate.
19. Ultimately, therefore, it is the responsibility of the charity trustees to consider what is appropriate in the particular circumstances of their charity. They ought to bear in mind the need to look particularly critically at the areas of highest risk in their charity. For example, if most of the charity’s income is received by post then we recommend that priority be given to ensuring strict controls in that area. However, lower priority areas should not be neglected. Proper controls over gifts in kind and the way they are used is just as important as the control of money.
20. Advances in technology may be used to simplify many record-keeping and transaction processes. This does not remove the need for sufficient controls to be put in place. It will, however, require that controls be adapted to meet the changes in practice which will occur.
21. One of the prime means of control is the separation of those responsibilities or duties which if combined would enable one person to record and process a complete transaction. If duties are segregated, this reduces significantly the scope for errors and oversights, as well as deliberate manipulation or abuse, and builds in additional checks. For example, if the person who records incoming cash is the same person who checks that cash paid in is recorded on the bank statements, it would not be easy to detect any dishonesty. Mistakes are also more likely to go undetected if a person checks their own work. The principle of segregation is important with regard to both income and expenditure, and capital transactions. We appreciate that the degree of segregation of duties which can be achieved will vary according to the size and nature of the charity concerned.
22. We recommend that trustees ensure that where necessary they have access to independent professional advice. They need to also ensure that their staff and any volunteers are competent, properly trained and qualified for the tasks they have to perform. The relationship between the charity’s trustees, accountant, and independent examiner or auditor ought, wherever possible, be one of ongoing dialogue, rather than simply an annual exchange of records and information. Any general or specific advice from the accountant, independent examiner or auditor must be brought to the attention of all of the trustees.
23. If the internal controls described in this guidance are put in place, trustees will have gone a long way to ensuring that they have taken good precautions to protect the charity’s funds. However, in order to achieve full control over the charity’s finances, it is necessary to work within an agreed budget and to undertake full financial planning. Proper and realistic estimates of expected income and expenditure need to be made for each financial year. We advise that regular reviews are made to ensure that the charity’s budgets are not stretched beyond their limits.
24. Approval of the budgets and accounts can only be done after discussion at trustee meetings. The discussions need to be fully minuted. It is important that trustees understand the financial information which is given to them. They may therefore need to consider recruiting trustees with particular financial expertise, and in any event need to ensure that full explanations and training are provided for those who are not so familiar with financial matters.
25. In larger organisations some of the budgetary work could be delegated, but the trustees still have the overall responsibilities referred to in paragraphs 17 and 18.
26. Trustees are under a duty to take control of and to safeguard all funds to which the charity becomes entitled.
27. It is important to take all possible action to bring all funds sent to the charity by post into its control as soon as possible. Circumstances will vary from one charity to another but the controls to be considered include the following:
28. In this respect, the aim of internal financial controls is to ensure that the charity has as much control as possible over what could be a widespread network of fundraising efforts. It is also important to remember that trustees have to ensure that they operate according to the various statutory regulations which govern public collections. These regulations are made under the House-to-House Collections Act 1939 and the Police, Factories etc (Miscellaneous Provisions) Act 1916 (which regulates street collections). Our guidance Charities and Fundraising (CC20) explains the legislative framework under which trustees must operate when raising funds from the public.
29. In addition to adhering to statutory requirements, we recommend that the following controls are in place:
30. Similar points arise for envelope collections which are authorised by a Home Office Exemption Certificate.
31. The responsibilities of the trustees here are similar to those for collections, ie to make sure that the charity is in control of the funds raised on its behalf so that it receives all the money to which it is entitled from such events.
32. We recommend that the following controls are in place:
(i) that tickets all be pre-numbered;
(ii)a record be kept of all persons who have been issued with tickets to sell, and of which ticket numbers have been allocated to each;
(iii)a record be kept of which tickets have been sold; and
(iv)a reconciliation be made of receipts against tickets sold.
33. Similar records need to be maintained for sponsored events.
34. Where external fundraisers are engaged, care needs to be taken to comply with the requirements of Part II of the Charities Act 1992 (our guidance Charities and Fundraising (CC20) gives further details).
35. Donations through the Gift Aid Scheme are increasingly encouraged by trustees as a tax-efficient way of raising funds. This is an important area as encouraging donors to give in a tax-efficient way is good financial management. It is important that accurate records are maintained in order to ensure that the charity receives all that is due to it from both the donor and HM Revenue and Customs, and that all money due is brought within the control of the charity without delay.
36. To ensure that the charity receives all the money to which it is entitled, we recommend that trustees:
37. For more information on the Gift Aid Scheme, please see HM Revenue & Customs Guidance Notes on Gift Aid, obtainable along with other advice and guidance by ringing 0845 302 0203.
38. Care always needs to be taken to ensure that, once funds are received into the control of the charity, their continued security is maintained. Following the guidelines listed below will provide a basic level of protection for the charity’s funds, but additional controls may be necessary depending on the individual circumstances of the charity.
39. It is important that trustees make regular checks to ensure that records are being accurately maintained (so that money and other assets received can be traced through the accounting system), and that there are no discrepancies in the accounting records. This is an elementary control, which is often ignored. If performed regularly, it will serve as an early warning of anything going wrong. In larger charities some of these checks may be delegated to employees but the trustees still have the responsibilities referred to in paragraphs 17 and 18. We recommend that frequent, random spot checks are made to ensure (as a minimum) that:
40. These checks should be made by someone other than the person concerned with the original recording of the transactions.
41. Care needs also to be taken to identify and administer separately any funds received where the donor has placed restrictions upon their use, and to ensure that they are only used in accordance with these restrictions.
42. Records need also to be checked to ensure that there has been no unauthorised credit extended (eg through an overdraft facility) and that the finances of the charity are not placed under any strain by credit which has been approved.
43. It is important for trustees to bear in mind that they are responsible for all expenditure of charitable funds and have to account for how the charity’s funds have been applied. The basic rules of proper record-keeping, segregation of duties, and safekeeping of valuables are all vital. In larger charities, some of the duties may be delegated to employees, but the trustees still have the responsibilities referred to in paragraphs 17 and 18.
44. When making payments, we recommend that the following rules are followed.
45. Trustees have a responsibility to ensure that adequate checks are made to both confirm that purchases have been properly authorised, and that goods or services ordered have actually been received. We recommend that the following controls are in place (and are operated).
46. Although payment by cheque is generally considered a safe method of payment, there are still basic controls which we recommend are exercised in order to prevent any misuse of charity funds (these are set out below). If any particular control is delegated to employees the trustees still have the responsibilities referred to in paragraphs 17 and 18.
47. Dealing in cash represents an extra degree of risk, so a greater degree of care needs to be exercised. We recommend that:
48. This is often a major item of charity expenditure, and therefore warrants particular care to avoid any misuse of funds. Trustees need to ensure that the charity is not exposed to additional liabilities by a breach of statutory regulations, for example through failing to deduct and account for PAYE. We recommend that:
49. We also recommend that procedures be in place to ensure that control systems are not threatened when a member of staff is absent or leaves.
50. As with controls over incoming funds it is essential to check regularly that records of funds applied are being accurately maintained. Similarly we recommend that random spot checks are made to verify that:
51. These checks need to be made by someone other than the person concerned with the original recording of the transactions. Care also needs to be taken to verify that payments are made out of the correct fund wherever the charity administers restricted funds of any kind, eg a special appeal fund or an endowed fund.
52. As well as ensuring that they have control over the charity’s incoming and outgoing funds, trustees also have the duty of ensuring the safe keeping of the charity’s assets so that they can be effectively used to promote the charity’s objects.
53. This term includes such items as land, buildings, vehicles, fixtures and fittings, and equipment (eg computers and the data contained in them, fax machines) which are used in the charity’s activities. We recommend that the following guidelines be observed:
54. Investments (including stocks, shares, land and buildings) are normally held in order to generate income for the charity and to protect its capital. It is therefore vital to make sure that they are safeguarded. New powers and duties relating to investments have been introduced by the Trustee Act 2000, and in order that trustees comply with these we recommend that the advice given below be observed:
55. Further information may be found in our guidance Investment of Charitable Funds (CC14).
56. In the case of bank or building society deposits, we recommend that:
57. If, after reading this guidance, trustees feel that they need further guidance, more specifically aimed at their individual circumstances, we recommend they contact Charity Commission Direct.
The previous version of this guidance was dated May 2001. A number of minor changes have been made to keep the text as up to date as possible.
For further information you may find it useful to refer to the following Charity Commission publications:
CC3 The Essential Trustee: What you need to know
CC3(a) Responsibilities of Charity Trustees: A Summary
CC12 Managing Financial Difficulties and Insolvency in Charities
CC20 Charities and Fund-raising
CC60 The Hallmarks of an Effective Charity
CC61 Charity Accounts: The Framework
CC63 Independent Examination of Charity Accounts: Directions and Guidance Notes
CC64 Receipts and Payments Accounts Pack
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