Charity Commission updates guidance on internal financial controls (CC8)
The Charity Commission updated its guidance on internal financial controls (CC8) at the end of July 2011. CC8 sets out what internal controls are, why they are needed and how trustees should oversee them. The guidance covers: income, purchases, payments and assets and investments with a new section now added for loans in the July update.
A CC8 checklist is also published based on the guidance. The checklist is intended for use by trustees, charity staff or advisers to help them review their charity’s internal financial controls.
At least annually the trustees should ensure a review is conducted of the effectiveness of their charity’s internal financial controls. The publication of the updated guidance and checklist might be a timely moment to carry out that review.
Why review the operation of internal financial controls?
During our inquiry work, we still encounter situations of the uncontrolled use of cash, the signing of blank cheques and trustee remuneration (for their trustee role or their employment) not being correctly managed or on occasion not being properly authorised. The ‘tone at the top’ is important to effective controls. To be effective, the controls in place must be adhered to by trustees, staff and volunteers.
Just because last year there was no problem does not mean a loss cannot happen. For example an arts festival charity lost £25,000 to fraud because the treasurer stole money after falling into personal financial difficulty. In the preceding 13 years he had served the charity without blemish.
Even if a problem has not occurred yet, poor controls create the opportunity for a loss. A newly employed finance manager of a disability services charity stole £150,000 when he took advantage of, to quote the trial Judge, ‘somewhat inadequate’ procedures.
What were the main changes to the CC8 guidance?
Each of the changes noted below, is prefixed by the section reference (in brackets):
- (B6) Reference is made to the 13 areas of fraud identified and comprehensively reviewed in chapter 3 of the Charity Commission’s Compliance Toolkit (section B6);
- (B6) Reflecting emerging best practice following the Bribery Act 2010, reference is made to the 6 principles that should inform an effective anti-bribery policy, the need for a register of hospitality, register of interests and a policy on acceptance of donations;
- (C5) The anti-tax avoidance measures surrounding gift aid have changed with the new regulations around ‘tainted charity donations’ replacing the substantial donor rules;
- (D6) A recommendation is made that cash withdrawals are reviewed for authorisation and correctness. The misuse of cash withdrawals from bank accounts and the use of cash without supporting records are often uncovered in our inquiry work;
- (D7) To take account of developments in pensions a reference is made to the ‘automatic enrolment’ of employees in pension schemes. A reference is also made to the planned roll out to all employers by HMRC of the submission of real time information on payroll to HMRC;
- (D9) A new section covers loans, including loans advanced by trustees. Trustees are recommended to ensure all loans are documented and are in the interests of the charity and any conflict of interest is managed;
- (E2) Following changes to our guidance on Investments (CC14), the terms and basis for making ‘mixed motive’ and programme related investments should be documented;
- (E3) Following concern about the misuse of bank accounts and fraud, additional guidance has been added on checking direct debits and standing orders for correctness and making sure that bank accounts are operated properly.
To view the guidance, please click here.
Using the CC8 checklist
The checklist is an aid to provoke further thought rather than scorecard with a marking of a simple pass (yes) or fail (no) to each question. It is a matter of balancing risk and control.
For example in section D3 payment by cheque the question is posed: ‘is there a practice of not signing blank cheques?’ The answer may be ‘no’ because the treasurer has signed blank cheques due to the lack of availability of other signatories.
However, this pragmatic step opens the charity to significant risk. A better solution would be the use of authorisation limits whereby small cheques can be signed by one person. This may overcome the practical problem and be a reasonable risk to take even though it would mean answering ‘no’ to the question: ‘does the bank mandate require at least two signatories?’
Nigel Davies – accountancy policy team, Charity Commission