Does your Charity need an MOT test every year?

23 July 2015

This article was first published in the July edition of Governance magazine

The Charity Commission is not a government department like the Ministry of Transport (MOT), but it still wants you to undertake an annual road-worthiness check to ensure your charity is safe to operate.  I am referring to an Annual Return question on financial controls, new for 2015.  

Last summer the Commission undertook a consultation to consider revisions to the online Annual Return that is required to be completed by all registered charities with income greater than £10,000 and all Charitable Incorporated Organisations (CIOs).  Some of the changes proposed were in response to NAO demands, and after sector-wide criticism the Commission announced in October 2014 in its consultation analysis that some of the more controversial changes were being dropped.  In March 2015 details of the new Annual Return were released, and you can find them here 

The Annual Return is an online form that includes key information about the charity, including details of its operations and finances.  There are also questions on specific activities and key policies.  One of the new requirements is that charities will now have to confirm whether or not they have reviewed their financial controls during the period being reported.  Whilst this may seem an innocuous question, there are several queries that boards are likely to ask:

Will our response be known publically?
The Commission has stated that this question will “alert charities to good practice and improve the transparency and accountability of charities”.  Since the Annual Return is a private document between the charity and the Commission, the answer to the question will not be known to the public.  Given that a response has to be provided, charities making a negative reply only need to be concerned if they fear regulatory intervention.  Whether this would happen in a single instance is debatable if no other known issues exist, however repeated “No’s” clearly may cause the Commission to have concerns.  Incidentally, if you answer “Yes”, why not mention this in your Trustees Annual Report – which is publically available.

What is meant by a “review”?
No guidance is provide on this term, however the Commission points to its publication CC8, Internal Financial Controls for Charities, as providing legal and best practice.  CC8 is accompanied by a 9 page self assessment checklist that itself encourages charities to undertake a review at least once a year.  The inference is that completing the checklist will fulfil the purposes of a review.

It should be noted that CC8 has existed for many years, and charities have found it to be a very helpful tool.  So arguably the Commission is not asking charities to do anything new this year.  However, whilst the checklist will be undeniably appropriate for many charities, depending on individual circumstances it could be either onerous or inadequate.  So consider carefully if you are operating in a changing environment, what significant risks are being highlighted by your risk management processes, and what other assurance you have of the adequacy of financial controls.

What is meant by “financial controls”?
Definitions of internal control always refer to their role in the achievement of organisational objectives and ensuring regulatory compliance.  Certainly financial controls do not only address operational financial procedures.  CC8 refers to controls over financial management, reporting and governance.  Hence the scope of the review goes beyond operational processes and affects trustees’ responsibilities as well.

Should the review be undertaken every year?
Yes, to meet good practice requirements, but you must ensure it is proportionate and has value.  Other things being equal, using the same review approach every year is unlikely to flush out new concerns.  So try alternative approaches – rather than considering the controls that exist, start by identifying the risks that need to be controlled; perhaps brainstorm with your finance team areas where the charity may be at greatest risk; or use an independent reviewer or peer to challenge received wisdom concerning controls adequacy.

Doesn’t my statutory auditor or independent examiner review our financial controls anyway?
Well – yes and no.  The review of controls they undertake is primarily done in order to help support the scrutiny process and the resultant report, and it is not specifically designed to review the completeness and effectiveness of internal financial controls.  So it may contribute to financial reassurance, but it is not all you should do.

We have an internal audit, so surely we don’t need to do anything more?
If the auditor specifically considers the charity’s key financial controls, then this may be sufficient.  However, increasingly the scope of internal audits focuses on strategic risks, or only considers financial controls periodically.  Certainly internal audit should contribute to board assurance.

Does the Board need to review the actual Return?
Not necessarily, but bear in mind the Return includes a declaration that relevant parts have “been brought to the attention of the charity trustees, who have individually verified this and given their informed express consent to this submission”.  

Is there anything else we need to do?
A review without resultant action is pointless.  Where the review unearths concerns or weaknesses, make sure you take timely and robust remedial action, as there are charities that have not done so, to great cost.

Fraud and mismanagement can happen in any charity, so an annual process to review financial controls will help you guard against such woes, and enable you to address this new Annual Return question positively, ensuring you are fit to travel forward as an organisation.

For more information, please contact Sudhir Singh.