In this section, we explain the legal requirements and good practice for protecting your charity’s finances. The section splits into two areas of charity finance:
The 2005 Act requires that as charity trustees, you must:
Anyone who has given time or money to a charity will have an interest in seeing its resources used properly. A well prepared and informative set of accounts will give members, funders, donors and anyone else with an interest in your charity a good picture of the activities and how well you are using the resources.
Proper accounting records must detail day by day the money received and spent by the charity, the assets and liabilities of the charity and show the financial position of the charity at any time.
How you keep the records will depend on the size and complexity of your charity. For small charities, a manual record or simple spreadsheet may be enough. Larger charities may need specialist accounting software.
However you keep the records they should be easy to follow and kept up to date so that the financial position of the charity is clear at all times.
What do I need to include in the accounts?
What you need to put in the accounts is set out in the Charities Accounts (Scotland) Regulations 2006 (as amended). These Regulations detail the different types of accounts that can be prepared and what you must include in them.
The Regulations also contain specific rules for reporting on the activities of the charity, as well as the financial information. This activities report is called the Trustees' Annual Report.
For more details, please see our guide to the accounts Regulations.
External scrutiny of the accounts
All sets of charity accounts must be scrutinised by someone outside of the charity. This means that an independent person checks that the information in the accounts is a fair reflection of the charity’s financial position.
The type of scrutiny required is dependent on the charity’s turnover, governing document and the requirements of any funders.
For more details, please see our Independent Examination: Guidance for Charities and Independent Examiners.
What financial information do you need to submit?
Note: Charitable Companies, Charities registered in England and Wales and Registered Social Landlords.
As a charity trustee, you have a duty under the 2005 Act to act with the care and diligence that it is reasonable to expect of a person who is managing the affairs of another person.
This means that you must act with a higher level of care than you do with your own finances and affairs. You must make sure that you protect the charity’s resources and that you do not put the assets of the charity at risk. One way of doing this is to make sure that there are proper financial controls in place.
Banking is an important part of the financial controls. Charity trustees have a legal duty to protect the charity’s assets and so should make use of regulated banking services where these are available to make sure the charity’s funds are secure. When considering your charity’s banking arrangements, you should choose an organisation that is able to offer formal banking facilities and the full range of services that you need. In the UK those organisations that are able to offer formal banking facilities are usually authorised and regulated by the Financial Conduct Authority (FCA).
Good financial controls are tools for making sure that you manage the charity effectively and meet your legal duty to act with care and diligence.
Financial controls are the systems you have in place to make sure that you protect the assets of the charity. The controls aim to identify and manage the risks of theft or fraud, loss and conflicts of interest.
A major part of financial control is to review the accounts. A useful way to do this is to compare the amounts spent on individual expense categories since they were last reviewed with what was expected to be spent in that period. Ideally, a budget will be prepared and approved by the charity trustee board before the beginning of the financial year. Then the actual results can be compared to the expected or budgeted results, making it easier to investigate any differences or ‘variances’.
In a small organisation it may be appropriate just to compare the expenditure of one period with that of the corresponding previous period, for example the month before.
It is important to remember that being a charity trustee is a significant responsibility. Where controls are correctly set up and used they will both protect the assets of the charity and you as a charity trustee.
What areas do you need to consider?
All of the charity trustees have responsibility for the financial records, not just the treasurer. As charity trustees, it is important that you all have a basic understanding of the finances of your charity and can quickly identify if there are any problems.
The financial information should be discussed at meetings to make sure that everyone knows the charity’s financial situation. For example, finance should be a recurring item on the agenda of every board meeting. It is good practice that someone other than the treasurer also has an understanding of how the charity’s financial records are kept.
Some organisations find it helpful to set up a finance sub-committee of charity trustees and advisors with financial or accounting knowledge. They have additional meetings to spend extra time on detailed finance matters, like budget preparation, and then report back to the charity trustee board. Having a committee does not absolve the other charity trustees of their collective responsibility but can be helpful in clarifying matters that are submitted to the full charity trustee board.
Where possible you should separate out the administrative tasks so that no one individual has sole responsibility for the financial transactions of your charity. We call this ‘separation of duties’.
For example, when your charity makes a purchase the same individual (whether it is a charity trustee, employee or volunteer) should not be responsible for arranging the purchase, authorising the payment and making the payment. In very small charities, it can be difficult to have a separation of duties. You should make sure that checks are regularly carried out on financial records and transactions to compensate for this.
Your financial procedures should be documented. This will help where charity trustees change regularly and if something unexpected happens such as a treasurer being taken ill.
You should review your procedures annually to make sure they are still fit for purpose, being followed correctly and understood.
Where possible it is best to avoid the use of cash, as it is harder to maintain a trail of cash and much easier for theft or fraud to happen. You should encourage donations to be made by bank transfer, cheques or online and you should make payments in this way wherever possible.
If you do receive cash donations, two people should count these and then make sure the money is banked as soon as possible. You should issue receipts for the donations and not make any payments out of this cash before taking it to the bank.
You should keep petty cash to a minimum. Receipts should be required for all items of petty cash. Access to the petty cash box should be restricted. It should be held in a secure place, counted and agreed. A cashbook should be kept to record what goes into the petty cash and what is paid out of it. Each time there is money added to or taken out of the petty cash it should be recorded in the cash book with supporting documentation, such as a copy of a donation receipt or expenditure receipt. The amount in the petty cash box should be regularly counted and compared to the balance in the cashbook to make sure that all money is properly recorded and accounted for.
Banking is an important part of the financial controls. When considering your charity’s banking arrangements, you should think about the full range of services that you need and look for a bank that can provide them.
Banks will ask for details of all signatories and usually all the charity trustees, so be prepared to have this information available. You should be aware of the terms and conditions of your banking arrangements and advise the bank immediately of any changes that may affect these for example, a change of signatories.
Bank statements should be agreed to the accounting records regularly, at least monthly, and someone other than the person who is otherwise involved in the banking process should review these reconciliations.
Bank reconciliations should be reviewed at trustee meetings. In smaller charities, bank statements and transactions may be checked at trustee meetings.
Cheques should have a minimum of two signatories to make sure that it is not just one person who can make payments. You should have systems in place to check invoices and authorise payments before they are made.
You should not sign cheques where the amount and the recipient are not already filled in (blank cheques). You should ensure that the details on the cheque stub match the corresponding cheque. If this is not done the cheques may not be accounted for correctly and might result in lost or stolen money.
Automated payments from the bank account such as Direct Debits and Standing Orders should be subject to the same controls as other payments. A review of all such automated expenditure should take place regularly.
Internet banking and online payments: it can be more difficult to develop tight financial controls for bank transfers as access may be restricted to a single log in. You should consider making a rule that two people have to be present when large transactions are being processed.
If you fail to comply with these duties then this is misconduct and we do have powers to take action against charity trustees, where appropriate. Our response will be proportionate depending on the situation.
Where a charity trustee has acted reasonably and honestly it is unlikely to be treated as misconduct.
Find out more about what we can and cannot do and what to expect if we have a concern about your charity.
Here we set out the specific sections of charity law in Scotland relevant to each part of the guidance.