Firstly, I think it’s important to distinguish the difference between an ‘independent examination’ and an ‘audit’, and to clarify what each means. Both are forms of external scrutiny on your charity’s accounts that give your trustees, supporters, beneficiaries and general public assurances that the charity’s money is properly accounted for, with appropriate accounting records kept. But:

• Independent examination: a third-party must simply highlight any areas of concern.
• Audit: a third-party must provide an opinion on whether your accounts give a true and fair view.

Your charity will need an independent examination if it has income exceeding £25k.

However, you may volunteer to have an independent examination if your income falls below this threshold:

• Because your charity’s constitution dictates that you need to have one.
• If you’re going for external funding, an independent examination provides reassurance as it’s a good indicator that your finances are in order.
• Since the Trustees are legally responsible for preparing the accounts, some opt for an examination to give reassurance if they’re not heavily involved on a day-to-day basis.

Your charity will require an  audit if either:

• Your gross income exceeds £1m within the financial year.
• Your gross income exceeds £250k and you have a balance of aggregated value of assets that exceeds £3.26m.

To make it super simple to see what your charity is required to do, I’ve put together a qualification table. You can view it here…

If you are in any doubt, or want to read the finer details, the Charity Commission has published some great guidance, which I always point my clients towards. You can read it here…

Appointing the right examiner

When undertaking an independent examination or audit, it is the Trustees’ responsibility to appoint an appropriate person or accountancy firm. This person/firm must legally be:

• Independent: not influenced, or perceived to be influenced, by their relationship with the charity and its Trustees.
• The requisite ability and practical experience to carry out a competent examination: understand their responsibilities in relation to key governance and reporting requirements, and have sufficient accounting skill to carry out these responsibilities.

The Association of Charity Independent Examiners (ACIE) is the perfect place to start your search. It maintains a directory of qualified examiners online, or you can speak to them direct. You can find out more here…

This really depends on what type of charity you are.

If you are incorporated – a charity limited by guarantee and registered with Companies House – you will need to prepare accruals-based accounts, regardless of your income. Under this method, you must record every transaction regardless of whether it has been paid or not. For example, this would include every exchange of cash, as well as invoiced income and billed expenditure.

If you are an unincorporated charity or a charitable incorporated organisation (CIO), with an income below £250k, you can prepare your accounts on a ‘receipts and payments’ basis. This means that you only record transactions once the money has actually changed hands, for example cash given to the charity, or a payment towards promotional materials. This is typically what has gone in and out of your bank account(s) during the year.

However, when your gross income hits £250k or above, you must switch to accruals-based accounts.

If you want a simple view of what your legal requirements are with regards to preparing accounts, reporting and external scrutiny, based on your charity type, I’ve created a handy guide. You can view it here…

If we start with an unincorporated charity. Even though the charity is registered with the Charity Commission, it is not registered with Companies House, which means it has no ‘legal’ form. If the charity were to act in an unscrupulous manner, the Trustees would be personally liable.

Similar to an unincorporated charity is a CIO, which stands for ‘charitable incorporated organisation’. Operating under this structure, the charity becomes a legal entity in its own right, so the Trustees are afforded personal protection. However, the charity does not have dual registration – it is registered with the Charity Commission but not Companies House.

So given the choice of these 2 options, why would you choose to be an unincorporated charity when it carries so much risk?

The simple answer is because CIOs are a relatively new evolution of charity structure. Identifying the personal risk that Trustees were expected to accept, despite their role being voluntary, the Charity Act was updated in 2012 to afford them more protection.

In contrast, a charitable company is one that is set up with more of a corporate structure and is a more traditional way of a charity incorporating. Registered with both the Charity Commission and Companies House, your charity is viewed as a separate legal entity. This also means that you must submit your annual report and accounts to both Companies House and the Charity Commission.

And finally, a charitable trust is perhaps the simplest type of charity that is usually created following a will. Here, it’s unlikely that the charity is conducting ‘business’, but rather providing grants for a specific purpose.

Changing your charity structure

You may wish to change your charity structure, particularly if you currently operate as an unincorporated charity. Here it’s typical to have Trustee Liability Insurance, but what a lot of people don’t realise is that this usually only covers the fact that the Trustees have acted within the law for their role as a Trustee – it doesn’t cover them if the charity acts inappropriately or fraudulently.

To provide your Trustees with greater personal protections, you might like to consider switching to a CIO. It’s a process I’ve completed several times for my clients. We start by establishing the new CIO and then transfer the assets and liabilities of the unincorporated charity across. This probably oversimplifies the process, but it needn’t be difficult as long as all the correct steps are taken.

Restricted funds are those given to your charity for a specific purpose. For example, in a will, the donor may dictate that their legacy can only be used to buy an organ at the church, for much needed roof repairs or a specific project.

Unrestricted funds are essentially the holy grail of funds because they can be used for anything. They’re valued so highly that research published in Civil Society shows that, “The average charity would trade in a £1m restricted grant to get just half as much unrestricted income.” The best example of unrestricted funds are those acquired through fundraising.

In many ways, charities are no different to corporate organisations – they both have a core purpose, need people to run their operations and need money to spend on premises, marketing and accountancy software. But because charities are not-for-profit organisations, it’s very hard to acquire funding to cover the back-office costs. A lot of the time, when you submit a funding bid it won’t allow you to include these costs, only those relating to the service(s) you provide to your beneficiaries.

If your current fundraising efforts are impacting the unrestricted funds you have available, there are some simple things you can consider to keep your charity up and running, and serving its beneficiaries:

• Approaching corporates and individuals by talking about the impact of your work through real-life examples. Corporates in particular understand what it costs to run a business, so let them know your charity’s running costs, and how they can help.
• Check your reserves are adequate. It’s not necessarily enough to retain 3-6 months operating costs – you want to ensure your charity is ready to face any future scenario.
• Take a look at your costs. The environment in which you operate is constantly changing, so think about whether things are necessary or if you could do them a different way. Cloud-based accounting is a great example of a small change that can have a big impact…

A lot of charities choose to follow some very out-dated advice about retaining 3-6 months of operating costs. But the reality is that your reserves level is unique to your charity, because every charity has different income and expenditure.

Working with my clients, I always advise they take a risk-based approach to managing their reserves. So thinking about what the worst-case scenario would be for the charity, and then working out the minimum amount needed to cover those costs.

When approaching your reserves from a risk perspective, there are costs you need to include that don’t fall under operating costs, such as:

• Adhering to any funding commitments your charity has made to its beneficiaries.
• Payment for notice periods on contracts.
• Paying redundancy if staff need to be laid off.
• Repayment of any funding received in the form of grants that has not been spent.
  Your reserves level should be reviewed on a regular basis – at least annually, and ideally as part of the budgeting process.

Creating a reserves policy

In a recent review, the Charity Commission found that less than a quarter of larger charities accurately reported the level of financial reserves they hold in their trustees’ annual report.

The Charity Commission recommends having a reserves policy that sets out:

• How much your charity needs to hold in reserve and why.
• How and when your charity’s reserves can be spent.
• How often the reserves policy will be reviewed.

You can read the guidance in full here…

While I advise planning for the worst-case scenario to ensure your charity is covered, in reality, these funds form part of your unrestricted funds, and can be spent on any of your charity’s purposes. It means that if a great opportunity comes along, you have cash freely available to take advantage.

At a minimum I would recommend you have:

Declaration of interest policy

Legally, Trustees must declare if they have a conflict of interest. They should also look to withdraw themselves from decision making associated with that conflict, so they’re not seen to influence the outcome unfairly.

In addition, as a Trustee, you can’t benefit from your association with the charity. You will probably have a clause about this in your charity’s governing document, but having a separate declaration of interest policy shows that you’re acting in a transparent way, and always in the best interests of the charity and its beneficiaries.

Read more from the Charity Commission about conflicts of interest…

Trustee eligibility declaration

Individuals cannot become Trustees if they have certain criminal convictions, or if the Charity Commission has previously disqualified them from being a Trustee.

To become a Trustee, they must complete and sign a form to state they:

• Are willing and eligible to act as trustees.
• Understand their charity’s purposes.
• Have passed any checks required if the charity works with children or vulnerable people.

You can download the form I have created for this here…..

While this declaration must be returned to the Charity Commission, I also recommend retaining a copy for your own records.

Reserves policy

The Charity Commission recommends having a reserves policy that sets out:

• How much your charity needs to hold in reserve and why.
• How and when your charity’s reserves can be spent.
• How often the reserves policy will be reviewed.

You can read the guidance in full here…

To calculate your reserves level, I recommend taking a risk-based approach that ensures all your costs are covered in the event that a ‘worst case scenario’ should happen.

Read more about reserves levels here…[link to Q5]

Data protection policy

Your data protection policy needs to state:

• What data you collect.
• Why you’re collecting it.
• Where you’re going to store it.
• Who has access to it.
• When you intend to delete it.

Do not simply copy and paste a privacy notice from another charity’s or corporate’s website. The wording contained within is specific to that organisation, and can therefore land you in big trouble if it’s not quite right.

In addition, under the GDPR you may need to register your charity with the Information Commissioner’s Office (ICO). If you are unsure, the ICO has shared some great guidance specifically for smaller charities, including links to useful information and simple assessments to determine what your legal obligations are.

Find out more from the ICO…

If you are after some specific guidance on your charity’s data protection needs then I would suggest talking to Debbie at DT Information Governance.

Whistleblowing policy

Whistleblowing disclosures are designed to identify and deal with serious problems, such as fraud, safeguarding concerns and mismanagement, before they cause damage to your charity.

This should provide guidance to your Trustees/employees about what steps they need to take if something is brought to their attention. For example:

• The contact name of the person to report to.
• Confidentiality arrangements.
• How to make an allegation.
• The process for acknowledging, recording and investigating each allegation.
• The timetable for the investigation.
• How the outcome of that investigation is reported.

Sharing a framework for dealing with (potential) incidents ensures both the charity, and they personally are protected, and being transparent about your operations.

Safeguarding policy

Depending on what your charity does, this might seem strange – particularly if you don’t have direct contact with the beneficiaries of your service. But you have to consider who you may give money too, and understand how those organisations may operate. In performing your due diligence, you ensure your Trustees do not give money to third-parties that may have safeguarding issues, which could reflect badly on you.

The Charity Commission has some further guidance here…

Need some help?

If you are unsure about any of the above policies, or need help creating them for your charity, please email or call me:

• [email protected]
• 07419 786 943