Financial Governance

Good financial governance is essential for the effective and ethical operation of Scottish charities, other voluntary organisations and social enterprises. It ensures that resources are used responsibly, transparently, and in line with the charity’s purpose and legal obligations. Robust governance helps maintain public trust, supports compliance with regulatory requirements, and strengthens the charity’s capacity to deliver on its purposes and achieve long-term impact.

Sound financial governance is not just a legal necessity but a cornerstone of effective charity management. By ensuring proper oversight, transparent reporting, and responsible use of funds, Scottish charities can safeguard their purposes, earn public confidence, and deliver lasting social impact.

Definition

Financial governance refers to the systems, processes, and policies that guide financial decision-making, oversight, and accountability within an organisation. In the context of Scottish charities, it encompasses budgeting, financial planning, risk management, internal controls, and the preparation of statutory accounts and annual reports.

Legal Framework

Charities operating in Scotland must comply with the relevant legislation:

Charities and Trustee Investment (Scotland) Act 2005 (the 2005 Act)

The main piece of charity law in Scotland that sets out the requirements for being a charity and establishes OSCR.

The Charities Accounts (Scotland) Regulations 2006 (the 2006 Regulations) as amended

The 2006 Regulations set out in detail what information trustee annual reports and charity accounts must contain and when they must be submitted to OSCR.

Statement of Recommended Practice (SORP)

The SORP sets the framework for charity financial reporting in the UK for charitable companies, charities with income of £250,000 and more and all other charities preparing accruals accounts.

Key principles of good financial governance

Good financial governance ensures that a charity’s resources are used effectively, transparently, and in alignment with its charitable purposes. It involves oversight by trustees, robust financial controls, strategic financial planning, and clear accountability mechanisms.

Core Principles The following principles underpin effective financial governance in charities:

1. Organisational Purpose

Financial decisions must support the charity’s purposes, the delivery of public benefit and long-term sustainability.

2. Leadership

Trustees must provide strategic direction and ensure that financial management aligns with the charity’s goals. This includes setting budgets, approving financial policies, and monitoring performance.

3. Integrity

Charities must act with honesty and uphold high ethical standards in all financial dealings. Conflicts of interest should be identified and managed transparently. 4. Decision-making, risk and control

Trustees should make informed financial decisions based on accurate data and risk assessments. Internal controls must be in place to prevent fraud, error, and misuse of funds.

5. Board effectiveness

The board should collectively possess the financial skills and knowledge necessary to oversee the charity’s finances. Regular training and performance reviews are encouraged.

6. Segregation of Duties

Dividing responsibilities among different people reduces the risk of fraud and error.

7. Openness and accountability

Charities must be transparent about their financial activities. This includes publishing annual accounts, a detailed trustee annual report and an annual return to regulators (OSCR and Companies House if constituted as a company).

The role of charity trustees

Charity trustees are ultimately responsible for financial governance. Their duties include:

Understanding and reviewing financial statements
Approving budgets and monitoring expenditure
Ensuring the charity has effective financial controls and a good reserves policy
Seeking external advice when necessary

Ask questions! It’s a simple principle, but there is no such thing as a daft question when discussing finances. Good scrutiny starts with curiosity and seeking understanding.

Training and support can help trustees fulfil these obligations, especially for smaller charities where charity trustees may lack professional financial experience.