(Act Reference: Sections 44, 45, 46)

Charity Law in Scotland: The Charities and Trustee Investment (Scotland) Act 2005

If you haven’t already done so, please read our 'Introduction and Overview’ before reading further (see link below).

Introduction
Voluntary management committee members have a responsibility to report on the finances of their organisation. Depending on the status of the organisation (e.g. a charity or an incorporated body such as a company or an industrial and provident society) this may be a legal requirement. If the organisation is not a charity and is unincorporated the responsibility to report is more moral than legal. However, it is common for funders to require the production of proper accounts as a condition of funding.

Accounts are not just about money but include things like property, investments or assets. They will often contain explanatory notes to help the non-specialist reader understand what the financial information actually means and the annual report usually appears at the same time as the accounts – very often in the same document.

An organisation should keep proper accounting records throughout the year that make clear with reasonable accuracy at any time the financial position of the organisation. Normally 'the accounts' are produced at the end of an accounting or financial year and are therefore called end of year accounts. Many organisations use the public sector financial year as their financial year (i.e. April to March) but this is not compulsory. An organisation can delineate its own year or it can follow a different established one. For example, the European Union financial year is from January to December.

The organisation should report to a) all its members; b) any funders that require such reports; c) any relevant regulators. Whether or not it needs to have it accounts checked by someone depends on whether a) its constitution says it must; b) it is a funding requirement; c) it is a regulatory (i.e. legal) requirement.

Unfortunately, legal rules about accounting and reporting exist as well as not instead of any requirements that funders make in terms of accounting and reporting. It is a fact of voluntary sector funding that an organisation may have to produce reports etc as a condition of funding that it is not obliged to produce by law. For example, funders have been known to ask for an audit of very small sums that wouldn't need auditing under the law. This may have cost implications for an organisation because they may be required to produce multiple reports or sets of accounts in different formats. If the funders requirements are more onerous (and/or more expensive) than those required by regulation/law, organisations should consider whether to seek coverage of the extra cost from the funder who is making the requirement.

Whichever legislation regulates the charity, the voluntary management committee is responsible for making sure the accounts are produced properly.

Rules for Charities (1) : General
The Charities and Trustee Investment (Scotland) Act 2005 says that a charity must keep proper accounts, produce annual accounts (which must include an annual report on activities), have them independently examined or audited and send a copy to OSCR. The nitty gritty detail of what accounts must be like are governed by the Charities Accounts (Scotland) Regulations 2006, the key points of which are:

• The accounting period (i.e. the time that a charity has to submit its accounts to OSCR) will be 9 months. This is to match up with company law.
• Charities will not require an audit until their income reaches £500,000 or, if their income is less than that, they have an aggregate asset value (after deduction of liabilities) of £2.8 million or more. This also matches new provisions in company law.
• A charity can, if it chooses, produce 'receipts and payments' accounts if it has an  income of less than £100,000.
• If a charity's income is £100,000 or more it must prepare 'accrued' accounts.
• The regulations bring the 'Statement of Recommended Practice for Charity Accounting 2005' (known as the Charity SORP 2005) into legal effect in Scotland. Accrued accounts must be prepared in accordance with the SORP 2005. The intention is that whenever a new SORP is produced the regulations will be amended to reflect it.
• Receipts and payments accounts may be examined by 'an independent examiner who is reasonably believed by the charity trustees to have the requisite ability and practical experience to carry out a competent examination of the accounts'.
• Accrued accounts up to £500,000 must be independently examined by a professionally qualified independent examiner. A list of who counts as professionally qualified appears in the regulations. NB If a charity produces accrued accounts even though its income is less than £100,000 it must still have them examined by a professionally qualified independent examiner rather than a ''an independent examiner who is reasonably believed by the charity trustees' etc.
• A charity with an income of £500,000 or more must have an audit by a professional auditor.

The Office of the Scottish Charity Regulator (OSCR)’s monitoring process is the route by which annual accounts are submitted. Please see also our page “OSCR: Monitoring Charities” for further information on OSCR’s monitoring process (follow link to SCVO charitable status pages below).

Accounting records must be kept for 6 years after the end of the financial year to which they refer.

If a charity fails to submit accounts OSCR may appoint as person to prepare the accounts and make a report on what’s been going on. They must submit the accounts and the report to OSCR and to the charity trustees. This person has the power to enter premises, take documents and require assistance from ‘trustees, agents or employees’ of the charity. The trustees of the charity are liable for the costs associated with this.

Failing to comply with the requirements of this appointed person is guilty of an offence punishable by a fine not exceeding level 3 on the standard scale’ (which, at January 06, is £1000). However, since OSCR must act proportionately it is unlikely it would come to this unless the charity had consistently failed without any good reason to produce accounts and send them to OSCR.

OSCR has produced guidance on charity accounts (see links below).

Rules for Charities (2) : 'Duty to Report Matters to OSCR'
Independent examiners or auditors are under a duty to inform OSCR if, when they are ‘doing the books’, they unearth anything that they consider untoward (as far as the subject relates to "the purposes of the exercise by OSCR of any of its functions"). This duty overrides any duty to the client charity. Details are in section 46 and the quoted phrase is in 46 (3)(b).

Rules for Charities (3) : 'Dormant Accounts'
Under the Act a dormant account is a charity account where there have been no transactions on the account apart from payments into the account or those made by the financial institution (e.g. bank interest payments or bank charges) for five years. Financial institutions are not bound to volunteer information to OSCR about dormant accounts but OSCR has the power to make inquiries with respect to charities under section 28 so once OSCR has asked for details it is an offence not to comply (section 29 (6)).

If after making reasonable inquiries it OSCR can’t find anyone concerned in the management or control of the charity it can have the account closed and the money given to another charity or charities which they can use as they see fit.

If during the process the account suddenly stops being dormant (basically if someone takes money out of it) the process stops.

Regulations may be made by the Scottish Executive to do with dormant accounts. They can cover procedures & OSCR's costs. These regulations will presumably cover situations where someone ‘concerned in the management or control of the charity’ surfaces during the process and can show that their account is not, in fact, dormant.

What happens if a voluntary organisation is a Charitable Company?
The new Charities Accounts (Scotland) Regulations 2006 do not allow the same blanket exemption from the regulations for those organisations that are companies as well as charities as was provided for under previous law (i.e. Section 4 (14) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990). This means that charitable companies will have to be sure that they prepare their accounts in way that satisfies the requirements of both accounting regimes: company and charity. The good news is that, generally speaking, if a charitable company prepares accrual accounts following the charity SORP then those accounts will meet the requirements of both charity and company law.

So... is it best to do your own accounts or get them done by a professional?
Putting together the accounts can be relatively straightforward or it can be horribly complicated and the circumstances of voluntary organisations are so varied that there is no one answer to this question. It depends on the expertise and capacity of the management committee/board and the staff (if there are any); how much money is involved; the different sources of money; the cost and so on and so forth. The bottom line is that an organisation must take a decision based on its own circumstances. However,  if no-one in the organisation can get their heads round what is required it is almost certainly time to get professional help.

If an organisation is determined that it should be able to do its accounting in-house then it must ensure that the person responsible has the knowledge and understanding to do it properly. This will involve, at the very least, buying in some books and decent training for them. It is wholly unacceptable to place such responsibility on the shoulders of a well meaning but unskilled trustee or, for that matter, volunteer or member of staff.

There is a rather inexplicable assumption that ‘anyone can do the accounts’ yet this would almost never be applied to other areas of a voluntary organisations work, for example, nursing care, counselling, environmental conservation. In fact, the accounts are one of the most complex areas of any organisation, and doing them properly affects its very ability to survive. For this reason they should be done properly by people with the right skills to do so. Dealing with them this way should not be seen as an optional extra or a luxury.

What about accounting rules for other 'legal forms'?
It is possible for a voluntary organisation to be a type of incorporated organisation other than a company. This is because 'incorporated' doesn’t just mean ‘becoming a company’, it can mean, for example, becoming a Credit Union, an Industrial and Provident Society, a Cooperative or a Community Interest Company (CIC). The accounting rules for such organisations are made through laws specific to those organisations and regulated by different bodies who can provide guidance. For example: the Financial Services Authority regulates Credit Unions, Industrial and Provident Societies and many Cooperatives; the 'Regulator for CICs' regulates CICs! (Links below).

The Purpose of Reporting Requirements
It can’t be denied that all these various legal controls are pretty complex. They exist because any money given to voluntary and charitable organisations is seen as being held in trust by the organisation in order to realise its charitable purposes. (This is why voluntary management committee members of a charity are known as ‘charity trustees’).

It is important to understand that even though a charity might resemble a business in some ways the reporting requirements for charities are different. This is because businesses have to show profits whereas charities have to show they have spent money in pursuit of their charitable objectives and managed their various funds appropriately. The rules about how the accounts are presented are meant to make sure that when a person looks at the accounts it is easier for them to see how a charity is spending its money so they can assess whether it is doing so appropriately.