Learning from OSCR's inquiries: Good financial record keeping for charities
It’s essential that charities keep good financial records because they help trustees understand the charity’s financial position, support them in meeting their legal duties, and demonstrate to the public that charitable funds have been properly managed.
Reflecting on some of the casework and inquiries we have dealt with recently, we have identified lessons that other charities, and those who work with charities, may find helpful to understand in improving their financial record keeping.
Key lessons for charities
- Charities should keep accounting records that are appropriate to the size and complexity of the charity and its transactions
- Keep the charity's accounting records up to date
- Do not just rely on accounting software for record keeping
- Ensure responsibility for the charity’s finances does not rest with one person
Relevant duties of charity trustees
Charity trustees are the people in overall control and management of a charity. They may be known by different titles, such as directors, management committee members, or committee members, but the law considers them to be charity trustees.
They are responsible for safeguarding the charity’s finances and overseeing how funds are used and accounted for. Trustees do not need to carry out every accounting task themselves, but they must ensure that suitable systems, oversight and access arrangements are in place.
Charity trustees have a legal duty to keep proper accounting records, prepare annual accounts from those records, and submit the accounts to OSCR.
What are proper accounting records?
It is a legal requirement for accounting records to show, on a day-to-day basis, the money received and spent by the charity, its assets and liabilities, and its financial position at any given time.
They should enable trustees to prepare accounts that comply with the accounting regulations.
The records a charity keeps will vary depending on its circumstances and may be maintained manually or electronically.
For smaller charities, or charities with straightforward financial activity, the records may include:
- A cash book or spreadsheet recording day-to-day income and expenditure
- Bank statements which are reconciled regularly with the cash book or spreadsheet
- Invoices, receipts and other evidence of income and expenditure
For larger charities, or charities with more complex financial activity, the records may instead include:
- A general ledger, supported by purchase and sales ledgers
- Commercial accounting software records, including reports and supporting data
- Records of assets, liabilities, debtors and creditors
- Management accounts, budget reports and reconciliations used to monitor the charity’s financial position
Accounting records must be retained by the charity for six years from the end of the financial year in which they were created.
Issues found
In the course of our regulatory work, OSCR has seen the following issues commonly arise where accounting records are incomplete, inaccessible, or not properly maintained in a way that reflects charity accounting requirements.
Failure to distinguish between restricted and unrestricted funds:
In some charities, income and expenditure are not accurately allocated between restricted and unrestricted funds in the accounting records.
As a result, restricted funds are not properly monitored, and year-end fund balances cannot be verified accurately. This makes it more difficult for trustees to demonstrate that restricted funds have only been used for the purposes they were given for.
Inappropriate reliance on accounting software:
Some charities using commercial accounting software have submitted accounts to OSCR in formats more suited to non-charitable entities.
While accounting software can be helpful for recording transactions and producing reports, it does not always produce accounts that comply with the legal requirements for charities.
Limited access to accounting records:
Problems can arise when only one person has control of the accounting records.
If that person leaves the charity, or is unwilling or unable to share the information, trustees may be unable to access the records they need. This can affect the charity’s ability to prepare accounts, respond to queries and the ability of the trustees to maintain effective financial oversight.
Lessons for charities
1. Keep accounting records that are appropriate to the size and complexity of the charity and its transactions
For smaller charities, manual records or a simple spreadsheet may be sufficient. Larger charities may need specialist accounting software.
If a charity has several different project funds restricted to specific purposes, they will need records that allow the income and expenditure associated with each project fund to be identified, monitored and reported individually. This helps trustees ensure restricted funds are used only for the purposes for which they were given.
2. Keep accounting records up to date
Accounting records should be kept up to date so the charity’s financial position is always clear. This helps trustees make informed decisions, particularly where there are financial implications.
Keeping accounting records up to date also helps trustees identify when the charity’s income may exceed the threshold that requires a different form of accounts to be prepared or a higher level of external scrutiny to be carried out. In both cases, planning and preparation will be needed in advance of the end of the charity’s financial year.
3. Do not rely on accounting software alone
Accounting software can be helpful, but trustees should not rely on it alone to ensure the charity’s accounts meet legal requirements. Charities should check that their accounting software can produce accounts and reports that are suitable for charities.
Trustees remain responsible for ensuring the accounts are prepared in the correct format and comply with Scottish charity accounting regulations before they are submitted to OSCR.
4. Use accounting records to support accurate reporting
The accounting records should be accurate and sufficiently detailed to allow relevant financial reports to be produced throughout the year and presented to trustees at meetings.
Regular financial reporting helps trustees monitor whether the charity is operating within its budget, identify any emerging financial risks, and make informed decisions about future activities. It also helps ensure that restricted funds are used and reported appropriately.
The accounting records should also support the preparation of year-end accounts that comply with the charity accounting regulations. Trustees should satisfy themselves that the accounts are consistent with the underlying records and provide an accurate picture of the charity’s financial position.
5. Ensure responsibility for the charity’s finances does not rest with one person
All charity trustees share collective responsibility for the accounting records. It is therefore important that all trustees have a basic understanding of how the charity’s finances are managed.
It is good practice for someone other than the person keeping the accounting records to understand how they are kept, and for regular checks to be carried out on financial records and transactions. This helps reduce the risk of errors, loss of access, or over-reliance on one individual.
Good financial record keeping is essential to effective charity governance. It enables trustees to understand the charity’s financial position, monitor the use of funds, meet their legal duties, and prepare accounts that comply with charity accounting requirements. Where records are accurate, up to date and accessible, trustees are better able to identify risks, make informed decisions and demonstrate that charitable funds have been properly managed.