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Improving charities’ internal control practices

Improving Charities’ Internal Control Practices

The governing board of charities are primarily responsible for ensuring that the affairs of charities are well managed and that assets and funds are properly used for the purposes for which the charity was established.

To achieve this, charities must establish good internal controls, which are essentially a baseline set of financial and operational controls to protect assets and funds against loss, theft or fraud, or mistakes or even mismanaged conflicts of interest. Because, ultimately charities rely on public funds and there must be systems to show how these are being safeguarded and used. Having sufficiently rigorous controls provides protection for the charity’s assets and is the best defence for the trustees against the charge of failing to protect the charity’s assets and funds.

It is important that all those working in the charity whether board, staff or volunteers take the issue of internal controls seriously. Making controls work should not be seen as just the responsibility of the board or one or two senior staff members, but rather as a collective effort of all in the charity.

For this, the ‘tone at the top’, which is the culture of control awareness championed by the Board, is of paramount importance in garnering buy-in from all staff and volunteers. The nature and level of internal controls implemented will depend on the size of the charity and complexity of operations. A range of controls from documented policies and procedures, segregation of duties, reconciliations and checks, management review and conflict management procedures should be established in building a sound control environment.

There are challenges to implementing controls, particularly for smaller charities with limited resources. Often resources are prioritised to service delivery and doing good, whilst the responsibility for controls may take a less prominent role. Manual processes and limited resources make it difficult to adequately segregate duties and in some instances, the lack of control awareness and training for staff become real issues. This must be addressed by charity boards.

Once a charity has established good baseline controls which are sufficiently embedded in the daily operations, then the charity may wish to appoint independent persons to conduct internal audits to look at the effectiveness of its internal controls and help the Board / Audit Committee identify areas of risk. This review helps a charity take stock whether controls designed are working as intended and determine if new controls should be implemented or existing controls be enhanced. Ultimately, such reviews provide assurance not only to the charity Board but the public on how well the charity has safeguarded donors’ monies.