Rules for running a Charity:
Charities are an important part of society with many new organisations registering every day. Charities must take great care to ensure they retain their reputation and the public trust, therefore they must maintain strong internal procedures and controls; compliance and accounting must be accurate so interested people have confidence in the Trustees and the Charity at all times.
Charities must undergo:
Annual Monitoring Compliance:
- Complete and submit an Annual Return to OSCR
- Complete and submit a Supplementary Monitoring form annually (all charities with gross income in excess of £25,000)
- Complete and submit a set of annual accounts
The above documents need to filed within 9 months of the charity’s financial year end
Failure to supply the above documents on time will result in your charity appearing on the defaulting list, which could have a detrimental impact on your fundraising abilities and reputation.
The annual accounts will be reviewed by OSCR to ensure they include:
- A Trustees’ Annual Report
- Your Scottish Charity Number
- A Trustees’ signature, on behalf of all Charity Trustees
There are two different methods of preparing charity accounts depending on size and structure of the charity.
- Receipts and Payments accounts – Simple accounting that consists of a summary of all monies received and paid via the bank and in cash by the charity during its financial year, along with a statement of balances – often referred to as cash accounting. The information is more basic, but is easier to prepare and probably a cost effective solution for smaller charities where accounts are being prepared by someone other than an accountant. Under this scheme, the Charity does not require a full audit and can opt for an independent examination – see below. However if the charity is a company formed at Companies House then they must use the “accrued accounts method” below
- Fully accrued accounts – more complex accounts that give more detailed information (prepared in accordance with the Charities SORP), where costs or income are matched to the period in which the activity or liability is incurred. This is not necessarily the date on which money is received or paid out. An independent examiner can be used for accrued accounts where an audit is not required, but must be a member of a Professional body – more below
You only have to prepare fully accrued accounts if one of the following applies:
- the charity’s gross income in the financial year is £250,000 or more
- the charity is also a registered company at Companies House
- the charity’s governing document says it should prepare accrued accounts
- the charity’s funders have asked for accrued accounts
Audited Accounts vs. an Independent Examination
All charities must undergo an annual check by an independent person, who will review the accounts; produce and attach a report to go with the accounts and highlight any issues. Again there are two options here depending on the size and constitutional rules of the charity.
An independent examination looks at a charity’s accounting records and annual accounts and considers whether the accounts are a fair reflection of the underlying transactions. It also provides comfort to interested parties that the figures in the accounts and the Trustees’ Annual Report present an accurate picture of the financial activity of the charity for the accounting period under review.
Any unusual items in the accounts that may require further discussion or an explanation from the charity trustees would be highlighted. Most charities eligible to opt for an independent examination do so, purely due to the significant cost savings vs the cost of an audit.
Audits are required for larger charities, although smaller charities may also have to have an audit where the Trustees have opted for one or where stated in charity documents or the constitution.
Criteria for allowing an independent examination:
- Annual Income less than £500,000 and assets less than £3,260,000 – the charity can choose to opt for an independent examination, and dispense with the need for a more expensive audit. Trustees must be comfortable that an independent examination is sufficient and appropriate for their particular organisation.
- For charities who prepare Fully accrued accounts, the independent examiner must be a member of a Professional body, eg. CIMA, ACCA, ICAS etc.
- Charities preparing accounts on a receipts and payments basis with annual income less than £250,000 only require an independent examination, but the independent examiner does not have to be a Chartered Accountant, although the Trustees need to ensure they appoint a competent and suitably experienced person to undertake the examination
Choosing the right Accountant
Charity Trustees are responsible for the stewardship of their charity, and must at all times act in good faith with due care and diligence. They are responsible for maintaining accurate financial records, and ensuring strong internal procedures are in place to safeguard charity assets. With this in mind, it is sensible and prudent to engage a Chartered firm to examine and report on the accounts.
With AFM Accountants, who are regulated by the Chartered Institute of Management Accountants, Charity Trustees are safe in the knowledge that they have instructed highly professional and independent accountants who can support their charity in a number of ways including:
- Undertaking the annual independent examination
- Assisting with the Annual filing to OSCR
- Practical advice on management accounts and systems
- Preparation and maintenance of financial records.