We outline the main responsibilities of a trustee of a charity with a particular emphasis on accounting and audit requirements. If your charity is in the London area we, at BRM, can help maintain your charity's accounting records or prepare the annual report.
It is often considered an honour to act as a trustee for a charity and an opportunity to give something back to the community. However, becoming a trustee involves a certain commitment and level of responsibility which should not be underestimated.
Whether you are already a trustee for a charity, be it a local project or a household name, or are thinking of becoming involved, there are a number of responsibilities that being a trustee places upon you.
We outline the main responsibilities below, with a particular emphasis on accounting and audit requirements.
The charities sector in England and Wales is generally overseen by the Charity Commission. The Commission is a government department that requires the registration of most charities.
The Commission plays an important role in the charity sector and is in place to give the public confidence in the integrity of charities.
All charities need to demonstrate that their aims are for the public benefit, initially as part of their application process to the Charities Commission and subsequently each year at the time they prepare their annual report.
A key part of the Commission’s work is to provide advice to trustees. A great deal of useful advice can be found on the Commission’s website, where there is a section dedicated to Setting up and running a Charity.
Types of charity
Charities can be created in a number of ways but are usually either:
- incorporated under the Companies Act 2006 or earlier (limited company charities)
- incorporated under the Charities Act 2011 (Charitable Incorporated Organisations – CIOs) or
- created by a declaration of trust (unincorporated charities).
Each of these charities need to register and file their accounts with the Charity Commission and limited companies are additionally registered with Companies House.
All charities are affected by the Charities Act 2011, which was a consolidating act bringing together a number of pieces of existing legislation.
The type of the charity will determine the full extent of a trustee’s responsibilities.
Who is a Trustee?
The Charities Act 2011 defines trustees as 'persons having the general control and management of the administration of a charity'. This definition would typically include:
- for unincorporated charities and CIOs, members of the executive or management committee
- for limited company charities, the directors or members of the management committee.
Trustee restrictions and liabilities
In addition to the responsibilities of being a trustee, there are also a number of restrictions which may apply. These are aimed at preventing a conflict of interest arising between a trustee’s personal interests and their duties as a trustee. These provide that generally:
- trustees cannot benefit personally from the charity, although reasonable out of pocket expenses may be reimbursed
- trustees cannot be employees of the charity.
There are limited exceptions to these principles. Where trustees do not act prudently, lawfully or in accordance with their governing document they may find themselves personally responsible for any loss they cause to the charity.
The CC guidance CC3a, ‘Charity Trustee: What’s involved’ explains what it means to be a trustee and how to become one. Trustees have full responsibility for the charity and are required to:
- follow the law and the rules in the charity's governing document
- act responsibly and only in the interests of the charity
- use reasonable care and skill and
- make well-informed decisions, taking advice when they need to.
The Charity Commission publication CC3, ‘The essential trustee: what you need to know’ provides more detailed guidance for both new and existing trustees. The guidance sets out trustees’ duties and responsibilities under seven headings:
- ensure you are eligible to be a charity trustee
- ensure your charity is carrying out its purposes for the public benefit
- comply with your charity’s governing document and the law
- act in your charity’s best interests
- manage your charity’s resources responsibly
- act with reasonable care and skill
- ensure your charity is accountable.
In particular, trustees are under a legal duty to make sure that their charity’s funds are only applied in the furtherance of its charitable objects. They need to be able to demonstrate that this is the case, so they should keep records which are capable of doing this.
There are particular requirements for most charities to:
- keep full and accurate accounting records (and funds requirements are of particular importance here)
- prepare charity accounts and an annual report
- to ensure an audit or independent examination is carried out
- to submit an annual return, annual report and accounts to the Charity Commission (and, for limited company charities, to Companies House).
The extent to which these requirements have to be met generally depends upon the type of charity and how much income is generated.
An important aspect of accounting for charities is the understanding of the different 'funds' that a charity can have. The effective management and control of fundraising is an important trustee responsibility.
Essentially funds represent the income of the charity and there may be restrictions on how certain types of funds raised can be used. For example, a donation may be received only on the understanding that it is to be used for a specified purpose.
It is then the trustees' responsibility to ensure that such 'restricted' funds are used only as intended.
The annual report
The annual report is often a fairly comprehensive document, as legislation sets out the minimum amount of information that has to be included. The report generally includes:
- a trustees' report (which can double as a directors' report and a strategic report, if required for charitable companies)
- a statement of financial activities for the year
- an income and expenditure account for the year (for some charitable companies)
- a balance sheet
- a statement of cashflow
- notes to the accounts (including accounting policies).
Whether or not a charity requires an audit will depend mainly upon how much income is received or generated and their year end. The income limit varies according to the type of charity as follows:
- all charities where income exceeds £1,000,000 require an audit for financial years ending on or after 31 March 2015.
- charities (both incorporated and unincorporated) require an independent examination where their income falls between £25,000 and £1,000,000 for financial years ending on or after 31 March 2015.
- where income is over £250,000 the independent examiner must be suitably qualified.
There are other criteria to consider, particularly regarding total assets, and we would be pleased to discuss these in more detail with you.
There is a comprehensive framework in place that determines how a charity’s accounts should be prepared.
Unincorporated charities with income below £250,000 may prepare receipts and payments accounts.
All other charities must prepare accounts that show a 'true and fair' view. To achieve this the accounts generally need to follow the requirements of the Charities Statement of Recommended Practice (SORP). There are two SORPs in issue at present :
- SORP 2015 (FRS 102)
- SORP 2015 (FRSSE).
These replace the SORP 2005. Both the 2015 versions of the SORP, (FRS 102) and the (FRSSE) are effective for periods beginning 1 January 2015. The FRSSE version of the 2015 SORP is for smaller charities and the FRS 102 version is for those larger charities. For a small charity it will be up to the trustees to choose which SORP will be most suitable for their charity although it should be noted that the FRSSE SORP has a short shelf life and will be withdrawn for financial years beginning on or after 1 January 2016. The two new SORPs can be viewed here.
How we can help
A trustee's responsibilities are many and varied. If your charity is in the London area and you would like to discuss these in more detail or would like help in maintaining your charity's accounting records or preparing its annual report please contact us at BRM.
We are also able to advise on whether or not an audit or independent examination will be required.