Charity trustees and internal financial controls

Good internal financial controls are the trustees’ best weapon in safeguarding charity funds

According to a 2012 poll by IPSOS MORI, the most important factor driving trust in charities is knowing that a ‘reasonable proportion of donations make it to the end cause’.

Most trustees understand this and take their fiduciary duties seriously. These duties include safeguarding funds, using them only for the purposes given and guarding against their loss.

However, some charities are not doing enough to protect their charities against loss and fraud. The National Fraud Authority's Annual Fraud indicator 2012 estimated that the charity and not-for profit sector lost £1.1bn to fraud in 2010/11.

Good internal financial controls are the trustees’ best weapon in safeguarding their charity’s funds. Far from being a back-office issue, effective internal controls are essential to safeguarding a charity’s assets - and its reputation.

The Charity Commission has updated CC8, its guidance on internal financial controls. This sets out what internal controls are, why they are needed and how trustees should oversee them.

Key pointers 

The updated guidance covers internal controls for: income generation (fundraising, gift aid, tainted charity donations); purchases, payments and loans (authorisation processes for goods and services, grant payments, cheques, charge cards, bank transfers, wages and salaries, record keeping); and assets and investments (controlling fixed assets, electronic banking, non-traditional banking and the proper use of restricted and endowment funds).

The guidance also helps trustees identify 13 common areas of financial risk and provides tips on how to create the right control culture within the charity.

Reviewing your charity’s internal financial controls

Our guidance advises trustees to review their charity’s internal financial controls at least once a year, to check that they are being properly adhered to and are effective.

If your charity relies on a volunteer treasurer to handle the finances single-handedly, a second, unrelated trustee should be involved in the review. This provides an independent check and enables the wider trustee body to get a fuller appreciation of what the treasurer’s work involves.

If your charity has a finance department, the treasurer or chair of the finance or risk management committee should work with the finance team to conduct the review.

This helps bring in a fresh perspective and allows those taking part to ask questions that staff dealing with the charity’s finances day to day might miss.

It is also important for the reviewers to test for themselves how the charity’s existing controls are being implemented; it’s not sufficient to rely solely on the assurances of staff members.

Any poor practice identified is not always a sign of fraud. Insufficient financial controls may result from a well-intentioned desire to ‘get things done’, but it is the trustees’ responsibility to manage risks in and ensure assets are protected.

Using the model checklist

The updated guidance includes a checklist intended for use by trustees, charity staff or the charity’s professional advisers when reviewing internal financial controls. 

The checklist is intended as a tool to provoke further thought and to help trustees balance risks and controls.

Anti-fraud guide for trustees

For more information on how to recognise and tackle fraud in charities, please refer to the charity fraud guide for trustees produced by the Charity Finance Group. 

Nigel Davies, accountancy policy team, Charity Commission