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Four ways to improve your charity’s annual report and accounts

02 Jul 2024

As the Scottish Charity Regulator, part of our work is to monitor whether charities across Scotland are carrying out their duties properly. This includes the requirement for all charities to prepare an annual report and accounts, and submit this to OSCR on time.

To help us monitor compliance with accounting requirements and identify areas where charities require more help and guidance, we undertake regular reviews of the accounts submitted to us.

We recently reviewed the accounts of 60 charities, selected at random to represent the full scope of the Scottish charity sector, and have found four key areas where charities can improve their annual reports and accounts.

The full findings of this research can be found in our new report: Lessons learned from reviewing charity accounts.

Trustees’ Annual Report

We found that there were several charities where the Trustees' Annual Report was either missing or deficient.

The Trustees’ Annual report is an opportunity for the charity to tell the story of its activities, achievements, and performance for the year and tie this in with the financial information. A good Trustees’ Annual Report can let the users of the accounts understand what activities the charity is undertaking and how it is meeting its objectives. This can encourage people to support the charity and provide funding. It also provides assurance to us that the charity is operating appropriately.

How to improve: Charity trustees should ensure that the Trustees’ Annual Report contains all the required information and properly tells the story of the charity. More guidance as to the Trustees’ Annual Report can be found here.

Comparative information

Some charities failed to include comparative information within the accounts. This means that it is not possible to compare the performance of the charity from one year to the next, or to understand variations. It also means that it is difficult to understand if opening balances are correct and carry forward appropriately from the previous year.

How to improve: Ensure you include comparative prior year information in your accounts. See our charity accounting guidance for more information.

Reserves policy

We found that around 67% of charities did include some information about their reserves. In most cases, however, the information provided did not meet the legal requirements. Many charities made simple statements about how funds would be applied rather than including a reserves policy. Where a reserves policy was included, it tended to be based on several months expenditure without a full rationale as to why this is. There is little evidence that charities are actively considering their performance against their reserves policy.

We have now updated our FAQs and the guidance in the receipts and payments work pack to provide some better information for charities when considering their reserves policy.

We are also reviewing our reserves policy factsheet to ensure that it clearly explains the link between the reserves policy and the charity's ongoing financial planning.

How to improve: Charities need to better understand what a reserves policy is, how to develop a reserves policy and how to monitor against that policy. Charity trustees need to understand how proper management of the charity’s reserves is a key element of good governance. Our article, How much do you need in charity reserves?, contains useful information and resources.

Governing documents

There is continuing evidence that in smaller charities, there is a lack of understanding of the requirements of the governing document. In our sample, several charities had audit requirements in the governing document which they were not adhering to. In addition, there were charities who did not have the required minimum number of trustees, compromising appropriate decision making and exposing the charity to potential criticism and reputational issues.

Our recent update to the annual return now asks all charities questions relating to their governing document. This should help smaller charities understand the need to review the governing document and ensure that they are following this.

How to improve: Make sure your charity is complying with the requirements set out in your governing document, and review it if necessary. Our guidance and good practice for charity trustees contains a section with more information on governing documents.

View the full report here: Lessons learned from reviewing charity accounts.