charities an industry accounting and auditing...

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CHARITIES

An Industry Accounting andAuditing Guide

Fifth edition

Anthony Epton BA FCA CTA FCIE

Wolters Kluwer (UK) Ltd145 London Road

Kingston upon ThamesSurrey KT2 6SR

Tel: 0844 561 8166Fax: 020 8547 2638

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Disclaimer

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Contents

PagePreface and acknowledgements xvList of abbreviations xix

Chapter 1 – History and definition 11.1 Introduction 11.2 The history of charity 21.3 Definition of a charity 31.4 Registration 81.5 Declaration of status 91.6 Charity names 11

Chapter 2 – Trustees, duties, liabilities and insurance 132.1 Introduction 132.2 Who is a ’charity trustee’? 132.3 Who may not be a charity trustee? 142.4 What are the trustees’ duties? 152.5 Responsibility for preparing the report and accounts 162.6 Other financial responsibilities 182.7 Risk 202.8 Investment of charitable funds 202.9 Liabilities and insurance 21

Chapter 3 – The regulatory framework 233.1 Introduction 233.2 The 1960 Act 243.3 The impetus for reform 243.4 The 1993 Act 253.5 Further changes 39

Chapter 4 – The Charities Act 2006 414.1 Introduction 414.2 Implementation timetable 424.3 New definition of charitable purposes 464.4 Providing public benefit 484.5 New thresholds for registration 544.6 Exempt charities 544.7 Excepted charities 554.8 Greater flexibility for smaller charities 584.9 Charitable incorporated organisation (CIO) 584.10 Audit and accounts 60

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4.11 Charity Tribunal 664.12 Duty and protection for whistle blowers 684.13 Other measures 694.14 Office of the Third Sector (OTS) thresholds consultation 76

Annex 1 Regulatory framework comparisons 80Annex 2 Public benefit – the Charity Commission 88Annex 3 Group accounts flow chart 94

Chapter 5 – Fundraising regulations 955.1 Summary 955.2 Definitions 955.3 Agreements with fundraisers and participators 965.4 Availability of books, documents and other records 965.5 Transmission of money or property 965.6 Indications of benefits and remuneration 975.7 Cancellation of payments 975.8 Unauthorised fundraising and false statements 975.9 Street collections 985.10 House-to-house collections 985.11 Revised guidance on professional charity fundraising 99

Chapter 6 – SORP 2005 1016.1 Introduction 1016.2 Background, overview and main changes 1026.3 The key features 1076.4 Practical considerations 127

Annex 1 Summary of formats 131Annex 2 Accounting for smaller charities 134Annex 3 A list of appendices and tables in the SORP 136

Chapter 7 – Trustees’ annual report 1377.1 Introduction 1377.2 Changes in SORP 2005 1377.3 Preparing the Trustees’ Annual Report 1397.4 Structure and components 1407.5 Reference and administrative information 1407.6 Structure, governance and management 1417.7 Objectives and activities 1427.8 Achievements and performance 1437.9 Financial review 1447.10 Plans for future periods 1457.11 Funds held as custodian trustee on behalf of others 145

Annex 1 Comprehensive example – Training For Life 146

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Chapter 8 – Reserves 1658.1 Introduction 1658.2 Charity reserves 1658.3 Examples of reserves policy 1698.4 Revaluation reserve 172

Chapter 9 – The Statement of Financial Activities 1739.1 Introduction 1739.2 Changes in SORP 2000 1739.3 Changes in SORP 2005 1749.4 The form and content of the SOFA 1759.5 Incoming resources 1789.6 Voluntary income 1849.7 Gifts in kind 1879.8 Donated services and facilities 1889.9 Activities for generating funds 1909.10 Investment income 1919.11 Incoming resources from charitable activities 1929.12 Other incoming resources 1949.13 Expenditure and costs 1949.14 Allocation of costs 1989.15 Resources expended 2009.16 Costs of generating funds 2009.17 Charitable activities 2029.18 Grant making 2049.19 Governance costs 2089.20 Transfers 2099.21 Gains and losses on fixed assets 2099.22 Gains and losses on investment assets 2109.23 Actuarial gains or losses on defined benefit pension schemes 210

Chapter 10 – Balance sheet 21110.1 Introduction 21110.2 Presentation 21110.3 Fixed assets 21310.4 Investment assets 22310.5 Programme-related investments 22710.6 Current assets 22810.7 Current liabilities and long-term creditors 22910.8 Provisions for liabilities and charges 23010.9 Defined benefit pension scheme asset or liability 23210.10 Share capital 23210.11 Revaluation reserve 23310.12 Pension reserve 23310.13 Guarantees 23310.14 Contingent assets and liabilities 233

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10.15 Loan liabilities 234

Chapter 11 – Accounting for separate funds 23711.1 Introduction 23711.2 What is a ’fund’? 23711.3 Fund structure 23911.4 Reconciliation and analysis of funds 24011.5 Transfers between funds 24111.6 Overhead costs 24111.7 Disclosures – particulars of individual funds and notes to the

accounts 24111.8 Total return 247

Chapter 12 – Cash flow statements 24912.1 Introduction 24912.2 Exemption 24912.3 Format of cash flow statements 24912.4 Major non-cash transactions 25412.5 Reconciliation with balance sheet figures 25412.6 Comparatives 25412.7 Disclosure examples 255

Chapter 13 – Accounting policies 25913.1 Introduction 25913.2 FRS 18 Accounting policies 25913.3 Disclosure of accounting policies 26013.4 Specific policies 26213.5 Incoming resources policy notes 26213.6 Resources expended policy notes 26413.7 Assets policy notes 26513.8 Funds structure policy notes 26713.9 Other policy notes 26813.10 Full example 26813.11 Small charity example 271

Chapter 14 – Other matters to be covered in the notes tothe accounts 273

14.1 Introduction 27314.2 Related party transactions 27314.3 Trustees’ remuneration and benefits 27614.4 Trustees’ expenses 27714.5 Staff costs and emoluments 27814.6 Cost of audit, independent examination and other financial

services 28014.7 Ex gratia payments 28114.8 Analysis of the net movement in funds 281

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Chapter 15 – Accounting for retirement benefits 28315.1 Introduction 28315.2 Defined contribution schemes 28315.3 Defined benefit schemes 28315.4 Allocation of retirement benefit costs and gains 28415.5 Restricted funds 28515.6 Consideration of going concern 28615.7 Reserves policy 28615.8 Disclosures 287

Chapter 16 – Application of accounting standards 28916.1 Statements of Standard Accounting Practice (SSAPs) 28916.2 Financial Reporting Standards (FRSs) 29116.3 Urgent Issues Task Force (UITF) Abstracts 301

Chapter 17 – Consolidated accounts 30717.1 Introduction 30717.2 Changes made by SORP 2000 30717.3 How are parent and subsidiary undertakings defined? 30717.4 What are the requirements governing the preparation of

consolidated accounts? 30917.5 Method of consolidation 31117.6 Disclosures 31217.7 Approval and filing of consolidated accounts 31417.8 Accounting for associates, joint ventures and joint

arrangements 315

Chapter 18 – Company charities 32118.1 Introduction 32118.2 Accounts and reports 32118.3 The Statement of Financial Activities and the summary

income and expenditure account 32218.4 Presentation of the summary income and expenditure account 32218.5 The balance sheet format 32318.6 Revaluation reserve 32418.7 Summary financial information 32418.8 Disclosure examples 324

Chapter 19 – Accounting for branches 32919.1 Introduction 32919.2 What is a branch? 32919.3 Accounting requirements 33119.4 Further considerations 33219.5 Connected charities 334

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Chapter 20 – Summary financial information and statements 33520.1 Introduction 33520.2 What are the requirements relating to summary financial

information and statements? 336

Chapter 21 – Small charities 33921.1 Introduction 33921.2 The Charities Act 2006 34021.3 The Charities 1993 Act versus the Companies 2006 Act 34321.4 Preparing accounts on the receipts and payments basis 34421.5 Accruals accounting for the smaller charity 35221.6 The application of the Financial Reporting Standard for

Smaller Entities (FRSSE) 35221.7 Charities with gross income not exceeding £500,000

(England and Wales) 353

Chapter 22 – Risk management 35722.1 Introduction 35722.2 Why risk management? 35722.3 Charity objectives 35822.4 Critical risk register 35822.5 Collate, prioritise and categorise 35922.6 Controls 36022.7 Continuity and change 36022.8 Commitment and responsibility 36122.9 Communication 36122.10 Creativity 36222.11 Costs 36222.12 Culture 36222.13 How can risk be managed? 36322.14 What type of risks do charities face? 36322.15 Identifying and managing risk 36422.16 Conclusion 365

Annex – Case study – risk assessment letter 366

Chapter 23 – Audit of charities 36923.1 Introduction 36923.2 Adoption of International Standards on Auditing

(UK and Ireland) 37023.3 The special audit features of charities 37123.4 Reporting requirements 37323.5 Terms of audit engagement 37423.6 Audit planning 37723.7 Materiality 38023.8 Consideration of laws and regulations 38123.9 Audit risk 384

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23.10 Audit evidence 39823.11 Audit completion 40323.12 Audit reports 41123.13 Reporting to the Charity Commission 41923.14 Adding value 42323.15 Ethical Standards 42723.16 Recent auditing issues 430

Annex 1 Bank report requests 437

Chapter 24 – Independent examination 43924.1 Introduction 43924.2 What is an ’independent examination’? 43924.3 Who is an independent examiner? 44024.4 Who is an ’independent person’? 44124.5 Which persons would have the ’requisite ability’? 44124.6 What is ’practical experience’? 44124.7 Selection procedures 44224.8 The Charity Commission’s Directions 44224.9 Reporting on summarised accounts 468

Annex 1 Guidance on the selection of an examiner CharityCommission guidance under section 43(7)(a)of the Charities Act 1993 469

Annex 2 Examples of independent examiner’s reports 472Annex 3 Examples of deliberate or reckless misconduct 477

Chapter 25 – Trading income 47925.1 Main statutory exemption 47925.2 What is a trade? 47925.3 Statutory exemption from tax 48125.4 Trading activities of charities 48125.5 Primary purpose trades 48425.6 Chargeable periods beginning on or after 22 March 2006 49125.7 Extra-statutory concession relief for fundraising activities 49225.8 Calculating the profits of the trade 49525.9 Using a trading company 49525.10 Financing the trading company 49625.11 Business rates 49725.12 Stamp duty land tax (SDLT) 49725.13 Stamp duty reserve tax (SDRT) 498

Annex Trading by charity – flowchart 500

Chapter 26 – Employment taxes 50126.1 Introduction 50126.2 Casual, temporary and volunteer workers 50126.3 Is somebody an employee or self-employed? 502

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26.4 Tax advantages for charities 50826.5 Schedule E liability of beneficiaries of charities 50926.6 National Insurance Contributions (NICs) 509

Chapter 27 – VAT 51127.1 Introduction 51127.2 How VAT applies to charities 51127.3 The meaning of business 51227.4 VAT recovery for VAT-registered charities 51427.5 The treatment of grants 51527.6 Donations 51627.7 Examples of business and non-business activities 51627.8 Business membership and supporters’ subscriptions 51727.9 VAT reliefs that apply to all charities 51727.10 Donated goods 51927.11 Goods used by charities to collect donations 51927.12 Reliefs for medical goods 52027.13 Charity buildings 52027.14 VAT reliefs that apply to VAT-registered charities only 52127.15 Recent developments 523

Chapter 28 – Giving to charities 52728.1 Introduction 52728.2 Gift aid 52728.3 Deeds of covenant 53428.4 Benefits received by donors 53528.5 Payroll giving (GAYE – give as you earn) 54428.6 Giving through the tax return 54428.7 Legacies 54528.8 Gifting shares and securities 54528.9 Gifting land and buildings 54828.10 Giving to charity by businesses 54828.11 Recent changes 54928.12 List of statutory references 555

Chapter 29 – Charities in Scotland, Northern Irelandand the Republic of Ireland 557

29.1 Scope of SORP 2005 55729.2 Scotland 55729.3 Northern Ireland 55929.4 Republic of Ireland 572

Chapter 30 – The Companies Act 2006 57530.1 Introduction 57530.2 Objectives 57530.3 Directors’ duties 57730.4 Community interest companies 581

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30.5 Senior Statutory Auditor (SSA) 58330.6 Filing dates 58530.7 Late filing penalties 58530.8 Small companies 58630.9 Auditors limiting their liability 59030.10 Auditors’ rights to information 59030.11 Other measures (affecting company charities) 591

Chapter 31 – Recent developments in SORP 2005 59531.1 Scope of the SORP 59531.2 SORP 2005 – Information Sheet 1 59531.3 Charities accounts survey 60031.4 Updated Financial Reporting Standard For Smaller

Entities (FRSSE) 60131.5 Small charity disclosures 60131.6 SORP 2005 – Information Sheet 2 60231.7 Financial Reporting Exposure Draft (FRED) 42 – Heritage

Assets 60431.8 Trustees’ Annual Report 60531.9 Standard information return (SIR) 60731.10 SORP for the future 608

Chapter 32 – Managing in a downturn 61132.1 Recent survey 61132.2 Key points 61132.3 Conclusion 614

Annex – Performance management 616

Appendix 1 – The Charities (Accounts and Reports)Regulations 2008 619

Appendix 2 – Extract from Charities Act 2006: Chapter 6Audit or Examination of Accounts whereCharity is not a Company and Chapter 7Charitable Companies 665

Appendix 3 – Section 505 of the Income andCorporation Taxes Act 1988 671

Appendix 4 – Section 256 of the Taxation of ChargeableGains Act 1992 675

Appendix 5 – Model Gift Aid declarations 677Appendix 6 – Charity reserves and defined benefit

pension schemes 679

Index 699

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Preface and acknowledgements

The preface to the fourth edition of Charities: An Industry Accounting and AuditingGuide stated that it appeared ‘at a time of major regulatory change’. The verysame is true for this fifth edition.

Nearly four years have passed since the fourth edition was written. In that time,the following have been published:

+ Charities Act 2006;+ Companies Act 2006;+ Charities (Accounts and Reports) 2008 Regulations;+ Charities and Trustee Investment (Scotland) Act 2005;+ Charities Accounts (Scotland) Regulations 2006;+ Charities SORP 2005 2nd edition – May 2008, and+ The APB’s Practice Note 11 “The Audit of Charities in the United

Kingdom” (Revised) December 2008.

This edition of Charities: An Industry Accounting and Auditing Guide concentrates onall the major developments affecting charity accounting and auditing that haveoccurred during the past four years. The first two items listed above are the mostsignificant, and a whole chapter has been devoted to each.

Chapter 4 deals with the Charities Act 2006, which has proved to be one of themost historic pieces of legislation affecting the charity sector in that it has revisedthe definition of what a charity is – something that had not been achieved forover 400 years. Chapter 30 covers the extensive changes brought in by theCompanies Act 2006.

As for the SORP, the fourth edition of this book had to deal with how SORP2005 revised its predecessor SORP 2000. I have had a less onerous task in thisarea, as the May 2008 update of SORP 2005 has not introduced any major newmaterial. Nonetheless, in addition to the Charities Act and Companies Act,numerous other important documents have been published in the interim, andthese have been fully reflected in this book. I have also added a brand-newchapter on the impact of the ongoing economic recession, suggesting howcharities can turn the situation to their advantage.

In terms of the general and background information on the charity sector, themajority of this information has been retained from previous editions.

I would like to express my thanks and appreciation to my two partners atGoldwins, Stephen Goodwin and Anthony Benosiglio, who have both supported

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me throughout this project. Simon Levine, Goldwins’ VAT consultant, providedthe necessary technical input to Chapter 27 on VAT, and Harvey Freemanoffered his usual incisive comments throughout the book.

I would also like to thank all those at CCH for enabling this book to bepublished.

My dear wife, Lara, has also been a source of inspiration and encouragement tome. Finally, I am particularly indebted to Adrian Randall, who is now ChiefExecutive Officer of the Heart & Stroke Foundation of Barbados. It was Adrianwho first introduced me to the world of charity accounting and gave me theopportunity to succeed, without which I would not have been able embark onthis rewrite.

I am also grateful to the Charity Commission for allowing me to reproduceextensively from their various publications.

I particularly acknowledge the invaluable contributions made by the authors ofthe previous editions of this book, Nick Morgan and David Chitty.

I sincerely hope that all readers of this book will find it of value to them in theirrespective charitable pursuits.

Anthony Epton BA, FCA, CTA, FCIE

June 2009

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Chapter 2 – Trustees, duties, liabilitiesand insurance

2.1 IntroductionThere has been a significant growth in the charity sector with the need forincreased accountability. The requirements for charity accounts, increasedcontrols over fundraising and the strengthened powers of the CharityCommission are part of a general initiative to upgrade the regulatory frameworkwithin which charities operate. The Charities Act 2006 has seen further changesto the duties and responsibilities of trustees, while there are also other aspects ofthe law (for example, the Companies Act 2006), to which charities may generallybe subject and which are constantly evolving. As a result, trustees may be unsurewhether or not they are acting within the law.

2.2 Who is a ‘charity trustee’?

The Charities Act 2006 confirms that ‘charity trustees’ has the same meaning ass. 97(1) of the 1993 Act, which defines ‘charity trustees’ as ‘the persons havingthe general control and management of the administration of a charity’.Paragraph 7 of Appendix 1 of the SORP states that ‘the status of a charitytrustee is defined in terms of the function to be performed, and not by referenceto the title given to any office, or membership of any committee or committees’.Thus, regardless of the constitutional form of a charity, the group of individualswho have responsibility for the overall management and administration (forexample, members of the board of directors, or management or executivecommittee or similar description) will be the charity trustees.

Where a non-charitable body corporate acts as a trustee of the charity, as in thecase of the NHS charities, it and not its directors will be the charity trustee.Persons elected to manage a branch, where it is an integral part of the wholecharity, may not be charity trustees. Conversely, some national charities have astructure where their local groups are constituted as independent registeredcharities; in these circumstances, those in charge will be charity trustees.‘Custodian’ (or ‘holding’) trustees are not included within either of the abovedefinitions, as they do not actively involve themselves in the management andadministration. Rather, their responsibilities are limited to holding the assets ofthe charity for safe-keeping and in carrying out the instructions of the charitytrustees.

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2.3 Who may not be a charity trustee ?

Sections 72 and 73 of the 1993 Act implemented the recommendation of theearlier Woodfield Report but widened the grounds for disqualification.

Under s.72(1), a person is disqualified from acting as a charity trustee if he:

(a) has been convicted of any offence involving dishonesty or deception(including theft, forgery or fraud)

(b) has been adjudged bankrupt or sequestration of his estate has beenawarded and (in either case) he has not been discharged

(c) has made a composition or arrangement with, or granted a trust deed for,his creditors and has not been discharged in respect of it

(d) has been removed from the office of charity trustee by order of the CharityCommission or by the High Court on the grounds of any misconduct ormismanagement in the charity’s administration for which he wasresponsible or to which he was privy, or which he by his conductcontributed or facilitated

(e) has been removed under s. 7 of the Law Reform (Miscellaneous Provisions)(Scotland) Act 1990 (powers of Court of Sessions to deal with managementof charities) from being concerned in the management or control of anybody; or

(f) is subject to a disqualification order under the Company DirectorsDisqualification Act 1986 or an order made under s. 429(2)(b) of theInsolvency Act 1986 (failure to pay under county court administrationorder)

Disqualification is, generally, automatic. Disqualified trustees, who may havebeen appointed lawfully, do not have to take steps to resign or be removed fromtrusteeship. They should immediately cease to take any further part in thecharity’s affairs. Under s. 73(4), the Charity Commission may even require thereturn to the charity of the value of any benefits trustees may have received fromthe charity while disqualified. However, acts done for a charity while disqualifiedwill not be invalid by reason only of the disqualification (s. 73(3)).

Section 72(4) allows the Charity Commission to waive disqualification eithergenerally or in respect of a particular charity or a particular class of charities, forexample in the case of charities working with ex-offenders. However, a waivermay not be granted in relation to any company charity if the person isdisqualified under the Company Directors Disqualification Act 1986 and has notbeen granted permission under that Act to act as director of any other company.

Section 73 imposes penalties (either a term of imprisonment or a fine, or both)for acting as a trustee while disqualified. This does not apply to a trusteedisqualified on the grounds of (b) or (f) above, as those offences will be dealt withunder company law.

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Section 72(7) requires the Charity Commission to keep a register, which is opento the public, of all persons removed from office by them.

2.4 What are the trustees’ duties ?

It is important that trustees not only know that they are trustees but, also, have anawareness of their duties in order that they may effectively discharge them.

In February 2008, the Charity Commission updated their leaflet CC3 (TheEssential Trustee – what you need to know), which defines charities as ‘organisations setup for the benefit of the community’. It states that ‘charity trustees are the peoplewho serve on the governing body of a charity’.

Trustees’ duties are as follows:

1. accept ultimate responsibility for directing the affairs of the charity, andensuring that it is solvent, well-run, and delivering the charitable outcomesfor which it has been set up;

Duty of compliance – trustees must:

1. ensure that the charity complies with charity law, and with the requirementsof the Charity Commission as regulator; in particular ensure that thecharity prepares reports, annual returns and accounts as required by law;

2. ensure that the charity does not breach any of the requirements or rules setout in its Governing Document and that it remains true to the charitablepurpose and objects set out there;

3. comply with the requirements of other legislation and other regulatorswhich govern the activities of the charity, and

4. act with integrity, and avoid any personal conflicts of interest or misuse ofcharity funds or assets;

Duty of prudence – trustees must:

1. ensure that the charity is and will remain solvent;2. use charitable funds and assets wisely, and only in furtherance of the

charity’s objects;3. avoid undertaking activities that might place the charity’s endowment,

funds, assets or reputation at undue risk, and4. take special care when investing the funds of the charity or borrowing funds

for it to use;

Duty of care – trustees must:

1. use reasonable care and skill in their work as trustees, using their personalskills and experience as needed to ensure that the charity is well-run andefficient, and

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2. consider getting external professional advice on all matters where there maybe material risk to the charity, or where the trustees may be in breach oftheir duties.

2.5 Responsibility for preparing the reportand accounts

The accounts should include an adequate description of the trustees’ relevantresponsibilities. The matters to be included will reflect the specific requirementsof the reporting entity. The APB Practice Note No. 11 The audit of charities in theUnited Kingdom (Revised) December 2008 Appendix 4 gives an illustrative wording ofa description which may be included in a charity’s accounts. Two examples ofthe wording are reproduced below dealing for both company and non-companycharities.

Example 1 Non-company charity

Trustees’ responsibilities in relation to the financial statements

The trustees are responsible for preparing the Trustees’ Annual Report and thefinancial statements in accordance with applicable law and United KingdomAccounting Standards (United Kingdom Generally Accepted AccountingPractice).

The law applicable to charities in England and Wales requires the trustees toprepare financial statements for each financial year which give a true and fairview of the state of affairs of the charity and of its incoming resources andapplication of resources of the charity for that period. In preparing thesefinancial statements, the trustees are required to:

+ select suitable accounting policies and then apply them consistently;+ observe the methods and principles in the Charities SORP;+ make judgements and estimates that are reasonable and prudent;+ state whether applicable accounting standards have been followed, subject

to any material departures disclosed and explained in the financialstatements,

+ prepare the financial statements on the going concern basis unless it isinappropriate to presume that the charity will continue in business.

The trustees are responsible for keeping proper accounting records that disclosewith reasonable accuracy at any time the financial position of the charity andenable them to ensure that the financial statements comply with the CharitiesAct 1993 and the Charity (Accounts and Reports) Regulations 2008. They are


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also responsible for safeguarding the assets of the charity and hence for takingreasonable steps for the prevention and detection of fraud and otherirregularities.

Example 2 Company charity

Trustees’ responsibilities in relation to the financial statements

The trustees (who are also the directors of the charity for the purposes ofcompany law) are responsible for preparing the Trustees’ Annual Report and thefinancial statements in accordance with applicable law and United KingdomAccounting Standards (United Kingdom Generally Accepted AccountingPractice).

Company law requires the trustees to prepare financial statements for eachfinancial year which give a true and fair view of the state of affairs of thecharitable company and of its incoming resources and application of resources,including its income and expenditure, for that period. In preparing thesefinancial statements, the trustees are required to:

+ select suitable accounting policies and then apply them consistently;+ observe the methods and principles in the Charities SORP;+ make judgements and estimates that are reasonable and prudent;+ state whether applicable UK Accounting Standards have been followed,

subject to any material departures disclosed and explained in the financialstatements, and

+ prepare the financial statements on the going concern basis unless it isinappropriate to presume that the charity will continue in business.

The trustees are responsible for keeping proper accounting records that disclosewith reasonable accuracy at any time the financial position of the charity andenable them to ensure that the financial statements comply with the CompaniesAct 2006. They are also responsible for safeguarding the assets of the charitablecompany and hence for taking reasonable steps for the prevention and detectionof fraud and other irregularities.

If there is an audit, add

In so far as the trustees are aware:

+ there is no relevant audit information of which the charity’s auditor isunaware, and

+ the trustees have taken all steps that they ought to have taken to makethemselves aware of any relevant audit information and to establish that theauditor is aware of that information.

(See section 30.10).

Responsibility for preparing the report and accounts

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If the accounts are included on the charity’s website, add

The trustees are responsible for the maintenance and integrity of the charity andfinancial information included on the charity’s website. Legislation in the UnitedKingdom governing the preparation and dissemination of financial statementsmay differ from legislation in other jurisdictions.

The trustees are responsible for the preparation of the annual report andaccounts. Paragraph 25 of the SORP recommends that both documents areapproved by the trustees as a body, in accordance with their usual procedure (forexample, at a quorate trustees’ meeting).

2.6 Other financial responsibilities

Trustees are accountable for the solvency and continuing effectiveness of thecharity and the preservation of its endowments. They must exercise overallcontrol over its financial affairs. They should ensure that the way in which thecharity is administered is not open to abuse by unscrupulous associates oremployees, and that their systems of control are rigorous and constantlymaintained.

In practice, this statement can be broken down into of the following components:

+ internal controls;+ investment of surplus funds;+ budgeting;+ borrowing, and+ fundraising.

2.6.1 Internal controls

Should trustees fail to act prudently, lawfully and in accordance with theirgoverning document they may be in breach of trust and personally liable to meetany resulting call on the charity’s property or to make good any loss to thecharity. Furthermore, since trustees of non-company charities must act jointly inadministering a charity, they will be responsible jointly for any liability incurredby them or on their behalf.

It follows that while trustees should exercise appropriate care when entering intotransactions or contracts on behalf of the charity, their responsibilities extend tocareful oversight of the activities of others. Key to this is the establishment,monitoring and updating of appropriate internal controls. As emphasisedrepeatedly in Charity Commission inquiry reports, delegation of these duties to a


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chief executive or senior management team is not appropriate unless the trusteesthen exercise appropriate scrutiny in respect of the activities of that chiefexecutive or team.

2.6.2 Investment of surplus funds

Whatever the agreed level of reserves maintained by a charity, it is good practiceto invest any funds not needed for immediate expenditure.

Trustees are responsible for taking appropriate advice and ensuring that anyinvestment is suitable in terms of its duration, risk and rate of return. They areresponsible also for constant monitoring of the performance and continuingsuitability of the investments chosen. From the point of view of internal controls,it is advisable that no single trustee should be in a position to control a particularinvestment or policy generally.

2.6.3 Budgeting

It is essential that trustees make proper estimates about expected income andexpenditure in order to plan ahead effectively.

Budgeting, cash-flow forecasts and financial planning generally should form acentral part of a charity’s financial controls and this area should be subject toregular reporting to and monitoring by the trustees as a body. The charity shouldhave in place effective mechanisms to obtain the necessary level of information atan appropriate frequency. Variances against budget should be questioned and, ifdeemed necessary, the underlying causes addressed.

2.6.4 Borrowing

Before borrowing any sum, trustees should consider whether appropriate powersare present in their governing document. If there is any doubt, the CharityCommission should be consulted. If suitable powers exist, the trustees shouldobtain advice from a person of appropriate experience who has no interest in theproposed loan. This advice should cover whether the loan is necessary, whetherthe terms are reasonable and whether the charity will be able to repay the loanon those terms.

2.6.5 Fundraising

Trustees are responsible for ensuring that any fundraising activity is properlyundertaken and that all funds raised are properly accounted for.

Where trustees allow others to undertake fundraising on their behalf, they shouldensure that all sums are paid into a bank account in the charity’s name before

Other financial responsibilities

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deduction of expenses. Trustees should ensure that all fundraising methods aresubject to their approval and, where external fundraisers are employed, shouldarrange for a proper contract to be drawn up.

Finally, it should be noted that trustees should not benefit financially or otherwisefrom the charity either directly or indirectly. In the absence of an expressprovision in the governing document or specific authority from the CharityCommission, trustees are not entitled to receive any payment out of the charity’sproperty beyond the reimbursement of reasonable expenses (and these shouldonly be paid when supported by appropriate documentation). Any otherpayments, borrowing, contracts or other business with the charity may constitutea breach of trust. In such cases, the trustee may be required to make good to thecharity any loss that results or to account for any profit made (seesection 4.13.16 of Chapter 4).

2.7 Risk

Under SORP 2005 the trustees are required to include a statement in theirannual report confirming that the major risks to which the charity is exposed, asidentified by the trustees, have been reviewed and systems established to managethose risks. Risk management is covered more fully in Chapter 22.

2.8 Investment of charitable funds

Following the Trustee Act 2000, which came into effect on 1 February 2001, theCharity Commission produced guidance dealing with its effects and much of thisis CC14 (Investment of Charitable Funds: Basic Principles).

The guidance (which does not apply to the corporate property of companycharities and of other charities incorporated by or under legislation or to trusteesof common investment funds (other than pooling schemes) or common depositfunds), should be followed when investments are being made. In particular itrefers to:

+ the statutory duty of care;+ trustees’ investment powers;+ employing agents and delegating functions;+ appointing nominees and custodians;+ trustee responsibility for review;+ effects of trustees exceeding their powers, and+ investing in land.


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2.9 Liabilities and insurance

In the case of liability to third parties in contract, a company charity will enterinto contracts, sue and be sued in its own name. In contrast, for non-companycharities, creditors contract with the trustees and it will be them from whomcreditors may seek redress.

Whether or not a charity is a company, all trustees will be personally liable for allacts and omissions where a duty of care is owed to third parties. This will be sowhere there has been a breach of trust – for example, where the charity haspurchased investments not authorised by its constitution or under the TrusteeAct 2000, where funds have been spent on unauthorised activities, or where thetrustees have acted outside of the objects of the charity. Thus, any perceptionthat charity trustees of an incorporated charity are protected from personalliability is misguided.

The Companies Act offers a measure of protection for officers in cases wherethey may be liable in respect of negligence, default, breach of trust or breach ofduty, but have acted honestly and reasonably and where, having regard to all thecircumstances of the case, they ought fairly to be excused. Section 61 of theTrustee Act 1925 offers similar protection.

(See sections 4.13.19 and 4.13.20 of Chapter 4.)

Liabilities and insurance

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