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Independent public opinion research*, published in July this year, showed that 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, published in March, estimates 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 now updated its guidance on internal financial controls (CC8). CC8 sets out what internal controls are, why they are needed and how trustees should oversee them.

Key pointers on internal financial controls (CC8)

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 thirteen 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-today 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 their charity and ensure its assets are protected.

To view the guidance, please click here.

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 their charity’s internal financial controls. 

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

To view the checklist, please click here.

Anti-Fraud Guide for trustees

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

*IPSOS MORI Poll 2012: Public trust and Confidence in Charities
** National Fraud Authority Annual Fraud indicator 2012

Nigel Davies, Accountancy Policy Team, Charity Commission

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