Considerations for choosing an accounting and finance system for charity

Background

Choosing a new accounting / finance system that is fit for purpose in a charity can be a daunting exercise. Unlike commercial entities, charitable organisations tend to have multi-faceted reporting requirements, from different stakeholders, which put a lot of pressure on their finance and management teams. A small or medium size charity will probably need to report on:-Accounting system

  1. Income and expenditure in their natural headings, which may be sub-divided into headings that are more relevant to their internal management;
  2. Sub-categorise income and expenditure by activity (fundraising, charitable activities, governance, support costs) which may not necessarily be the same as those in a) above;
  3. Categorise income and expenditure in accordance with the headings for a donor report – which may be different to both 1) and 2) above;
  4. Split of restricted versus unrestricted income and expenditure;
  5. Some also split of the balance sheet between restricted and unrestricted assets, liabilities, and funds.

Any good finance system for a charity should provide multi-dimensional views of data so that a single entry can be categorised in multiple ways to fit the different reporting requirements.

Unfortunately, the majority of finance systems on the market are built for commercial organisations. There are very few which are customisable enough to cater fully for charity needs.

Other than price, we have listed below some considerations for choosing an accounting and finance system for charity, which management might find helpful when selecting the next system for the charity:-

Functionality and setup

Considerations

Parent-child structure in the nominal codes This can be helpful in creating report views that are based on the chart of accounts – e.g.

Ø  The SOFA

Ø  Management accounts

Ø  Donor reports that follow the chart of accounts structure

Desktop versus cloud systems There are many considerations here, but generally, cloud systems are likely to be more time efficient, not least for the ability to have bank feeds that allow for bank statement records to feed direct into the system. Preferences for control over your financial data is also key – i.e. having it on a local server where you can take your own back ups or in the cloud
Timesheet recording If you need to maintain timesheets, could this be done within the finance system so that time reports can be linked to to other reports (e.g. donor reports)?
Multi-user access  Your requirements for internal and external users, different levels of access, your accountants and managers
Multi-dimensional analysis To allow for income and expenditure to be analysed between e.g.:-

Ø  Multiple restricted and unrestricted funds

Ø  Cases / beneficiaries

Ø  Types of work

Ø  Departments etc.

Each block / categorisation required in reporting would need its own system object – otherwise it becomes impossible to distinguish the data in reports.

Sub-dimensions E.g. where you have a parent activity and child-activities e.g. education projects as a primary activity, and school outreach and teacher training as sub-activities
Automatic funds rollover at yearend Do you need this to happen automatically or can you live with a manual journal entry?
Software updates for new features as they become available Free or payable? Is it an annual license?
Support plan options Do you have to pay for after sales support or is it included?
User interfaces How easy is the software to navigate? Can you see the full text of the list selections? Is it a system where you type any part of a field and select?

Multiple windows: can you view multiple windows at the same time?

Easy error correction Can you easily correct errors or is the system too rigid? For various reasons, most small charities will need to have a fairly flexible system for error correction.
Search function What can you search for? Full text versus ‘wild cat’ search

VAT

Integrated VAT reporting Particularly if your charity has exempt activities. As a charity, chances are you have outside the scope income (grants and donations), exempt supplies would bring into the picture partial exemption calculations… Not all systems will cope well.

Budgeting

Multiple budgets  Can you have multiple budgets for the same period? Can you budget for multiple financial periods?
Project budgets  Can you have individual project / activity / fund budgets?
Donor budgets  Can you have budgets by individual donor?

Other systems and processes

Integration of other internal systems and internal controls Ø  Payroll

Ø  Timesheet recording

Ø  Stock management

Reporting

Customisable reports  Different views of the same data or being able to change what you see on the report yourself. Pre-built report types, rather than pre-built reports (report types are more customisable to get reports, reports are just what they are)
Balance sheet analyses  By project or donor
Drill down to the transaction level Is this possible on all reports or just some or none?
Donor dimension reporting Where a donor report describes expenses differently from the standard chart of accounts, is there an option to slice information in this additional dimension at a transaction level and in reports?
Audit trail  Can  you get a log of who changed what when
Expenditure to be analysed by funding source or donor Most systems will be able to give a report of income by donor; many will not be able to give you report of expenditure by donor because they don’t have the ability to mark expenditure as being paid for by this or that donor.

This is not an exhaustive list, but it may be a good starting point for assessing a charity’s requirements when considering a new finance system.

Share

Fraud risk management for small charities

News of charity fraud has heavily hit the sector in recent months. Both staff and trustees have been implicated, and charities small and large have fallen victim of fraudulent activity.

In June 2013, the Charity Commission reported that 1 in 10 charities with income over £100,000 had found fraud in that financial year, and the estimated financial loss to charities in that year due to fraud was almost £150m.

In November 2013 alone, there have been various reports of fraud actions in court:

The impact of fraud on a small charity can be devastating. Financially, the financial loss may be unrecoverable. But also, the damage to the organisation’s reputation is immeasurable.

Understanding fraud

Action Fraud, the UK’s national fraud and internet crime reporting centre, defines fraud as “when trickery is used to gain a dishonest advantage, which is often financial, over another person”.

In its nature, fraud is a covert activity, which is designed never to see the light of day. This makes it particularly difficult to detect fraudulent activity, and charities cannot afford to be complacent about their fraud risk management.

Fraud triangle

Perhaps one of the most insightful ways of thinking about fraud was a term coined by an American penologist and criminalist, Donald R. Cressey. He thought that there are three factors that are always present for every fraud situation:

  • Motive – the circumstances that create a need to commit fraud e.g. need for money;
  • Opportunity – the circumstances that make it possible for the fraud to occur; and
  • Rationalisation – the ability to justify the fraud, e.g. “Nobody cares about this, it’s tiny!”

While no organisation is immune to the risk of fraud, removing one of these factors can make it impossible for fraud to occur. In particular, organisations can close gaps in management controls (i.e. remove opportunity).

Big challenges for small charities

The Trustees have a legal duty to safeguard the assets of the charity. It is therefore their responsibility to design and instigate internal control mechanisms for preventing, detecting, and responding to fraud.

However, small charities face particular challenges in mitigating fraud risk. Often, there is simply not enough staff in the charity so that segregation of duties controls can be implemented. For example, the person holding cash is often the same person “authorising” and recording payments.

Small charities are particularly attractive for fraudsters, given the high level of embedded trust between colleagues in the sector. In many ways, a small charity can be much like a family, so it can be awkward to even contemplate that someone could defraud the charity.

The result is that the systems of internal control for fraud prevention and detection are generally less developed in small charities. But there are simple and generally cost free activities that the Trustees can adopt in order minimise the risk.

Risk assessment: identifying the exposure points

Assessing the risk of fraud in the organisation is one of the most important mitigation activities. This can be as simple as an outline list of situations in the organisation’s normal course of business which present opportunities for fraud. For example:

  • Grants and donations received in cash.
  • Income received by a single person over a period of time i.e. a small amount at a time.
  • Expense claims for allowances, travel, and subsistence.
  • Changes to the accounting records.
  • All purchasing done by a single individual.
  • Diverting supplier payment to an employee’s own account.
  • Duplicate and/or fake invoices in the financial records.
  • Cheques being signed and cashed by the bank signatories.

Agree an action plan

Leading from the top, the Trustees should agree a mitigation plan showing how the charity protects itself against fraud. To save time, this could be done as part of a wider risk management process.

Preventative controls for small charities

For small charities, the operations and organisational structures can render conventional fraud control mechanisms ineffective. However there are alternative activities that Trustees could consider:

  • Have a finance sub-committee on the board with a higher level of visibility with regards to the Charity’s finances. They should also maintain a healthy level of scepticism and aim to promote best practice financial management.
  • All payments should be counter-authorised by at least one other person. Small charities should consider the feasibility of a trustee other than the treasurer authorising payments, while the treasurer monitors and scrutinises the expenditure.
  • Have a fraud policy and procedures in place. In particular, have a really simple reporting mechanism for fraud suspicion, including the option to report to members of the board of Trustees if the staff do not feel comfortable reporting the issue to their direct reports.
  • Have clear whistleblowing procedures in place.
  • During training or other day-to-day business activities, invite someone to speak to staff about fraud to increase awareness. Your accountants, local community accountancy group, or the skills sharing and mentoring service by The Coalition for Small Charities may be a good resource for this.
  • The finance procedures should include a limit to the amount that can be paid in cash and the nature of items that can be paid for in cash.
  • Consider using online banking, with double authorisation, to minimise cash and cheque transactions.
  • Wherever possible, commit the organisation to expenditure in its own name instead of relying on staff to pay and then reclaim in expenses.
  • Keep cash and other assets locked away. A fraudster can’t do very much if they don’t have access to the assets.

Detective controls

Detecting fraud can be really hard, even for a seasoned fraud investigator. Some of the actions a small charity could take include:

  • On-going review: The finance sub-committee should review the finances of the organisation on a regular basis.
  • Keep your management accounts simple, to help all trustees better understand and query them.
  • Spot checks, particularly identifying trends e.g. multiple payments going to the same payee with no apparent reason or standing contract, amounts changed on invoices consistently.
  • Maintain good record keeping: it is much easier to hide a fraud in a pile of disorganised documents.
  • Implement simple whistleblowing and reporting mechanisms.

Response

Even when we’ve done our best, fraud can still find its way through our preventative. Organisations need to have a fraud reporting and response mechanism in place to help them take appropriate action.

Internally, having an “ethics/compliance champion” can work well for some charities. This would be someone that staff would feel more comfortable with so they can report to them instead of going through the normal reporting lines.

Externally, if the fraud involves your bank accounts or business cards, you will need to inform the bank immediately.

If there are concerns over anyone’s safety, the charity should consider reporting to your local police.

If the case involves national taxes e.g. Gift Aid or VAT, you will need to report to HMRC. You can call 0800 788 887 to make a tax evasion report.

In all cases, suspected and actual fraud should be reported to Action Fraud (this can be done online at www.actionfraud.police.uk or by calling their helpline 0300 123 2040).

If you have reasonable grounds to consider the fraud a serious incident e.g. because the amount is significant, you will need to report it to the Charity Commission. This can be done by email at rsi@charitycommission.gsi.gov.uk.

Written by:

Charles Ssempijja

Director

NfP Accountants

Financial management for small charities & social enterprises

www.nfpaccountants.co.uk

Share