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.

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New audit thresholds for charities

On 19 December 2014, the government responded to the consultation on audit and independent examinations for charities, with a “plan to pursue proposals that include increasing the following thresholds from £500,000 to £1 million”. This new threshold will take effect for accounting periods ending or after 31 March 2015 and will affect charities in relation to:

  • income threshold at which a charity should have its accounts audited
  • aggregate group income threshold at which parent charities should have group accounts audited
  • preparation threshold for group accounts

But what does this mean for charities exactly?

Well, for most charities with total income of up to £1,000,000 there is the choice of having an independent examination of their accounts rather than a full audit. The technical view of an independent examination versus an audit is that a statutory auditor is required to a “positive opinion” as to whether or not the statutory accounts give a “true and fair view”.

By contrast, an Independent Examiner forms a “negative opinion” that states (if this is indeed the result of their work) that no evidence of lack of accounting records or compliance of the accounts with those records.

There are other matters that both an audit and independent examination make statements on, and the use of “positive” and “negative” assurance terminology in technical language can be misleading (as if “negative assurance” is somehow a bad thing! It is sometimes helpful to think of the two simply in terms of an audit making a statement that there is evidence to confirm one way or the other, but an Independent Examination stating that there has been no evidence found for lack of…

Benefits of an independent examination

In order to form the positive opinion that is required of the statutory auditor, they need to perform significantly more testing and review than is generally required of an independent examiner, in order to obtain the evidence that supports that opinion.

The “lighter-touch” Independent Examination (IE) is therefore a less onerous alternative for smaller charities, which results in significant savings for them, in two ways:

  • Staff time – less time will be spent between the reviewer and staff in order to complete the accounts scrutiny. Staff can in turn use this time on running the charity.
  • Fees – typically, an independent examination could cost up to 40% less than audit in actual fees payable by the charity.

As one client put it on hearing the news of an increased threshold:

“this will cut down on costs and the stress that comes with audit scrutiny”

Does an Independent Examination really provide sufficient independent scrutiny?

The Charity Commission has stated in its publication CC31 that “an independent examination is a simpler form of scrutiny than an audit but it still provides trustees, funders, beneficiaries, stakeholders and the public with an assurance that the accounts of the charity have been reviewed by an independent person.”

Whether this level of scrutiny provides sufficient assurance for the particular stakeholder is a matter to be discerned internally by each qualifying charity. However I have found that most stakeholders would appreciate the cost savings and opt for an Independent Examination. And where further assurance is required by a given donor, a grant audit can be arranged for their grant (the cost of which is often build into the grant itself in full).

Other considerations for independent examinations: Which charities are eligible for Independent Examination?

In England and Wales (there are different thresholds for Scotland and Northern Ireland), a charity would be eligible if it passes two sets of tests.

The first set of tests relates to the charity qualifying as a “smaller charity”. This means that:-

For accounting periods ending on or after 31 March 2015, the charity has total annual income not exceeding £1,000,000 (this also applies to aggregate income where it is a group); and (b) the charity has gross assets not exceeding £3,260,000.

A charity would still be considered a small charity if it had gross assets exceeding the asset threshold but where its income is below £250,000. (NB: if gross income is above £250,000 and gross assets exceed £3,260,000, then an audit would be required).

The second set of tests relates to other possible other requirement for a statutory audit. These may be internal, but others may be external. Such requirements include:-

  • The governing documents/constitutions of the charity may specify that an ‘audit’ is required (NB: constitutions can be amended if this is considered unnecessary)
  • A donor or funder may requires an ‘audit’ (NB: this can be discussed with the donor to lift the requirement and/or to have a grant audit instead)
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How a charity’s trustees should manage its investments

Third Sector article 29.01.14The issue of how to make the ‘right’ investment decisions is something that many trustees regularly have to deal with. In a recent article in the Third Sector magazine, I debated this issue with a sector colleague, Fred Worth, co-opted Trustee of Mencap, and have included some of the ideas discussed below.

For me, a charity’s investment decisions should be guided by two fundamental principles: first that the trustees have a legal responsibility to safeguard the assets of the charity, including cash and investments. By extension, they are required to ensure that they achieve the maximum return for the lowest risk possible. In practice, this can be a difficult balance to strike. On the one hand, charities’ resources are squeezed and any additional income (especially unrestricted) can go a long way. But the level of financial risk that comes with a high return may simply be unacceptable.

Second, any investment decisions made should promote the charity’s objectives, and not have a negative impact on the charity’s objectives. The reputational damage arising from investment decisions that don’t fit in with the charitable aims of the organisation are immeasurable. The recent media frenzy about Comic Relief’s investments (following the BBC’s Panorama programme, All In a Good Cause), is testimony how damaging some investment choices that the trustees make be on the charity and on the sector.

In practice, there’re some steps that trustees can take to help them manage the charity’s investments responsibly.

Here’re my top 10:

  1. Trustees should work with senior staff to define what they consider to be acceptable forms of investments for their charity. With so much choice in the market, this may be difficult and a lot of research will need to be done;
  2. List down all the industries or products that they must not invest in as a matter of principle;
  3. Consider the level of risk that they are prepared to take. All investments carry a risk that the initial investment could be lost, which would have a direct negative impact on the beneficiaries. On the other hand, a higher risk investment may have the highest return which would boost the charity’s ability to reach more beneficiaries;
  4. For most charities, it would be too expensive to hire an investment specialist and manage the investments in-house. Trustees should consider focussing on managed portfolios, have an analysis the funds in each portfolio, including where the funds are invested;
  5. Consult with other professionals in their sector – this may be a paid consultant, but in most cases, other professionals from similar charities would be happy to share their experiences for free;
  6. Have a list of the pros and cos for each fund portfolio, taking account of factors like management fees, rate of return, payment schedules, accessibility i.e. can they withdraw it at will, etc.;
  7. Try and diversify the investments in order to spread the risk (although this may be unrealistic for most smaller charities);
  8. Obtain and review investment performance reports as part of the management accounts review;
  9. Be transparent about the decisions made e.g. by including additional information in public records such as statutory accounts about the investment decisions; and
  10. Put the charity’s approach to investments in an Investment Policy.
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2013 in review: A round-up of small charity regulation

A very Happy New Year to you all from NfP Accountants! 2013 has been an interesting year. By the end of the year, it certainly felt like staying on the right side of the Charity Commission (as Wendy Cotton puts it) is something that no charity can afford to lose sight of. In the 2012/13 report on Tackling abuse and mismanagement by the Charity Commission, the sector regulator has pledged to take tougher actions going forward, and not just for late accounts filing, but also with respect to fraud, money laundering, governance, and other cases of charity mismanagement.

Some key changes in the regulatory framework for small charities

Gift Aid

Donations of goods: The year has seen a number of changes in the administration of Gift Aid. From April 2013, a single gift aid declaration was allowed for multiple donations of goods to a charity for resale (e.g. to a charity shop), to cover sales proceeds of up to £100 if the charity operates the shop directly, and £1,000 if the goods are sold by a trading subsidiary.

Small donations scheme: From 06 April 2013, the Gift Aid Small Donations Scheme was introduced, to allow charities to claim gift aid on small donations without a Gift Aid Declaration. A short Q&A and worked examples are available here to help explain the scheme.

HMRC online: An electronic system introduced by HMRC on 22 April 2013 for charity reclaims from HMRC, including Gift Aid claims. From 01 October 2013, all reclaims must be made through one of three ways:

  1. Using an online form: A list of donors and Gift Aid claims can be uploaded on an online form using a model spreadsheet. This allows up to 1,000 donors at a time.
  2. Using a compliant donor management database, which would allow the charity to claim for up to 500,000 donors at a time. Later in October, Comic Relief offered other charities free use of its Gift Aid software, which was developed to work with the new HMRC system. The software can be accessed here. Please note that at the time of writing, this free software could not be used for claiming on the Gift Aid Small Donations Scheme and it did not support payload encryption.
  3. Using a new paper form ChR1, which can be requested from the HMRC Charities Helpline

The Charity Finance Group published a useful guide on the new system, which can be accessed here.

Further guidance can be obtained from HMRC here.

The Annual Return

Many charities will have noticed changes in the Annual Return in 2013. Additional information was now required such e.g. whether the charity was registered for gift aid, and some previously optional information was now mandatory.

In 2014, it is expected that the Charity Commission will scrap the summary information return and will also display information about payments to Trustees on the online register.

Real Time Information reporting to HM Revenue and Customs (PAYE)

From 6 April 2013, employers were required to report PAYE information to HMRC in real time, meaning that the employer (or their accountant, bookkeeper or payroll bureau) has to:

  • send details to HMRC every time they pay an employee, at the time they pay them, and
  • use payroll software to send this information electronically as part of their routine payroll process.

There are relaxations for “small businesses” allowing them to report once a month (even if they pay their employees more frequently) until April 2014, when they will be required to comply in full.

Click here for more details and guidance on RTI from the HMRC website.

Pensions auto-enrolment

Employers have new legal duties to automatically enrol certain members of staff into a pension scheme and make contributions towards it. This is in order to encourage workers to save for their retirement. It is a staged requirement, which started back in 2012 for the largest employers first. Each employer has an allocated date to on which they must enroll their eligible staff. This is called a ‘staging date’.

Click here to find your staging date. Please note that you will need your organisation’s PAYE reference.

Jobholders can choose to ‘opt-out’, but this can only be done after they have been enrolled in the first place. An organisation cannot choose to not enrol eligible employees on the basis that they have opted out.

There’s a detailed Q&A on auto-enrolment here. Further guidance and information for employers, trustees, and individuals, and on getting ready for auto-enrollment is also available on the Pensions Regulator’s website.

Public benefit

On 16 September 2013, the Charity Commission published revised public benefit guidance for all charities. The new guidance helps explain and clarify the public benefit requirement for charities, having regard to the public benefit requirement when running a charity, and reporting on public benefit.

The new public benefit guides are available on the Charity Commission’s website here.

Charity SORP

On 9 July 2013, a consultation was launched by the regulators on a new Statement of Recommended Practice, which provides a comprehensive framework for charity accounting and reporting. The process closed on 04 November 2013, with over 1,600 voluntary sector representatives having taken part in the 26 consultation events.

The new SORP is due to be published in 2014 and is expected to come into force in line with FRS 102 for accounting periods starting on or after 01 January 2015.

NfP Accountants will be sure to bring you the key changes for small charities once the new SORP has been published.

Looking to 2014

There are already some great insights into what new regulatory changes we can expect in 2014. Some of these are included above, and there are some highlighted in the Autumn Statement (there’s a summary of key points for small charities here).

Please note that the information above is only intended to help small charities keep up to date with key regulatory changes, and specific advice should be obtained before taking action, or refraining from taking action, on any of the subjects covered above.

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Gift aid small donations scheme: Q&A

From 06 April 2013, HM Revenue and Customs introduced the Gift Aid Small Donations Scheme, to allow charities and Community Amateur Sports Clubs to claim Gift Aid without a completed Gift Aid Declaration on small donations.

What is the Gift Aid Small Donations Scheme?

The Gift Aid Small Donations Scheme (GASDS) was introduced on 06 April 2013, to allow eligible charities and Community Amateur Sports Clubs (CASCs) to claim Gift Aid on small cash donations, where it is difficult to collect a Gift Aid declaration. An example is cash collected in street collections or at religious services. Your charity or CASC does not have to know the identity of the donor, unlike with Gift Aid, payments under GASDS are not a tax relief and there is no audit trail back to the original donor’s tax record. You don’t have to collect Gift Aid declarations from your donors for GASDS.

Did the GASGS replace the Gift Aid Scheme?

No. The scheme is in addition to Gift Aid.

Can my charity claim under the GASDS but not under the Gift Aid Scheme?

Your charity or CASC still needs to make regular Gift Aid claims in order to be able to claim GASDS payments. You can still claim Gift Aid on donations under £20 and, unlike GASDS, there is no limit on the amount of donations on which your charity or CASC can claim Gift Aid relief. A donation on which a Gift Aid declaration is given to a charity or CASC cannot be a small cash donation for the purposes of the GASDS. If you haven’t made a Gift Aid claim before, or you haven’t claimed for some time, follow the link below to find out more about the Gift Aid scheme for charities and CASCs.

How is the amount the charity can receive from HMRC calculated?

GASDS is not a tax relief (like ‘normal’ gift aid). However, the payment is calculated in the same way as a Gift Aid payment even if the GASDS is not a form of tax recovery. Payments to charities and CASCs under the Gift Aid scheme and the GASDS are based on the basic rate of income tax for a tax year. So where the basic rate of income tax is 20 per cent, small donations of up to £5,000 a year will entitle the charity or CASC to a top-up payment of £1,250.

What donations are eligible?

The scheme applies to cash donations of £20 or less, received after 6 April 2013.

Is there a limit to how much can be claimed?

Most charities can claim Gift Aid on up to £5,000 of small cash donations in a tax year, giving a total of £1,250 in the GASDS for the tax year. However this claim limit may be restricted by the charity’s circumstances e.g. where it is connected to other charities, or if its income is below or above £5,000. Follow this link to use the ‘How much can my organisation claim under GASDS?’ flowchart to tell you if your charity or CASC may have a different claim limit.

Does my charity qualify?

If your organisation is recognised by HMRC as a charity or CASC for tax purposes and makes claims under Gift Aid, it needs to meet 3 conditions to qualify: the start-up period requirement, the recent claims condition, and the penalties condition.

What is the start-up period?

In order to qualify, the charity or CASC must have existed for at least two complete tax years (6 April – 5 April). This period is calculated from when the organisation was recognised as a charity or CASC for tax purposes rather than when the organisation registered with HMRC or started operating.

What is the recent claims condition?

In order to qualify, the charity or CASC must have made at least two successful claims (non-GASDS claims) during the previous four complete tax years, and there must not be a gap of two or more tax years between those claims or since the last claim was made. For this condition, the tax year to consider is the one in which you make the Gift Aid claim, not the year in which the donations that you are claiming Gift Aid repayments on were made. Gift Aid claims can be made up to four years after the end of the tax year that the claim relates to. NB: The condition is that you have 2 successful claims, so the charity would still qualify if this is met, even if it also had unsuccessful claims or penalties (see below) in the same tax year.

What is the ‘no penalties’ condition?

If a charity or CASC incurs a penalty in respect of a Gift Aid or GASDS claim, it will not be eligible to claim top-up payments under the GASDS for either the tax year in which that claim was made or the following tax year. However, successful Gift Aid claims made in those tax years will still count in determining eligibility in subsequent years.

My charity’s financial year is not coterminous with the tax year, when do we become eligible?

The GASDS is based on tax years, not on calendar years or any other 12 month period, such as the accounting period of your charity. You must use tax years (6 April one year to 5 April the next year) when you consider:

  • the eligibility conditions to see if your charity or CASC is entitled to top-up payments
  • the donations received
  • making a claim under the scheme

Can my donors claim tax back higher rate tax under the GASDS?

No. GASDS is not a tax relief, so higher and additional rate taxpayers will not be able to claim tax relief on their GASDS donations.

Can I claim for small donations received before 06 April 2013?

No. The scheme applies only to small cash donations received on or after 6 April 2013, so any donations received by your charity or CASC before 5 April 2013 will not qualify under the GASDS.

Click here for further guidance and information from the HMRC website. Click here to see worked examples of how the scheme operates in practice.

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Autumn statement 2013: Key messages for charities

The Autumn Statement 2013 took place on 5 December 2013. The statement provides an update on the government’s plans for the economy based on the latest forecasts from the Office for Budget Responsibility. Here is a round up of the key messages for charities.

Gift Aid

The government wants as many eligible donations as possible to attract Gift Aid, and will establish a new working group to revise the model Gift Aid Declaration to make it easier to understand, and to develop new promotional material to increase take-up. The government also intends to allow intermediaries to take a greater role in operating Gift Aid in order to reduce the number of instances where a new Gift Aid Declaration is given. However, following feedback from charities in the recent consultation exercise, it will consult further on the detail of how this can best be achieved, before changing legislation.

Cultural Gifts Scheme and estate duty

In the Finance Bill 2014, the government will amend legislation underpinning the Cultural Gifts Scheme to ensure that estate duty is brought into charge where appropriate.

Community Amateur Sports Clubs (CASCs)

Following a consultation over the summer, the government announced on 25 November 2013 a series of reforms to the tax regime for CASCs. As part of these changes, from April 2014 donations by companies of gifts of money to CASCs will be eligible for corporate Gift Aid. (Finance Bill 2014)

Joint registration of Charities between HMRC and the Charity Commission

HMRC will develop a new IT system to allow organisations wanting to register with the Charity Commission for England & Wales and seeking charity tax status with HMRC to submit their applications through a single online portal. The new system is planned to be introduced in 2015 to 16 and will later be extended to enable charities in Scotland and Northern Ireland to register with their charity regulators at the same time as they apply to HMRC.

Charity Shops

Government to provide additional support to the retail sector through a business rates discount of up to £1,000 in 2014-15 and 2015-16 for retail properties (including pubs, cafes, restaurants and charity shops) with a rateable value of up to £50,000, and a 50% discount from business rates for new occupants of previously empty retail premises for 18 months.

Stamp duty land tax (SDLT): charities relief

The government will legislate to make it clear that partial relief from SDLT is available where a charity purchases property jointly with a non-charity. The charity will be able to claim relief from SDLT on the proportion of the purchase attributable to it. The changes will take effect from the date on which Finance Bill 2014 receives Royal Assent. (Finance Bill 2014)

Charities established for tax avoidance purposes

Legislation will be introduced in Finance Bill 2014 to amend the definition of a charity for tax purposes to put beyond doubt that entities established for the purpose of tax avoidance are not entitled to claim charitable tax reliefs.

For further information:

Visit the government topical pages on the Autumn Statement 2013 here.

You can download the full statement here.

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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

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Chartered Accountant Launches New Employee-owned Firm for Small Charities

A new brand of accountancy business for small charities and not for profit organisations, such as social enterprises, has been launched. There are thousands of small charities and social enterprises in the UK, doing fantastic work, and yet, many are still struggling to keep on top of their books or make use of their financial data for management decision-making.

Although there are many accountancy firms serving the charity sector in the UK, NfP Accountants is set up to become the first employee-owned accountancy business. “It’s time to move beyond the traditional partnership model of accounting firms; for small charities and social enterprises, a more co-operative approach to financial management is best placed to provide the much needed support and at a reasonable cost”, says founder, Charles Ssempijja.

NfP Accountants Ltd will provide all manner of services to small charities and social enterprises. What’s unique about this firm is that small charities will now have an accountant that can work with them to build processes that connect finance with other strategic and operational management, particularly around donor management, project tracking, process automation, and jargon-free financial information for the non-accounting manager.

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