Missing financial records can leave charity trustees unable to explain historic transactions or show that spending was properly authorised. This case study shows how independent examination helped identify recurring weaknesses, supported further enquiries and led to stronger financial controls.
Trustees are responsible for making sure a charity’s money is properly controlled, decisions are appropriately authorised and transactions are backed by adequate records. When those arrangements haven’t worked for several years, incoming trustees can inherit problems they didn’t create but still have a duty to address.
This case, handled by ATS Accountants, shows how an independent examination can become the starting point for a much wider improvement in financial control, governance and accountability.
Certain facts have been changed or withheld to protect confidentiality.
The challenge
We were engaged to prepare the accounts and carry out independent examinations for a community charity whose financial records had developed significant weaknesses over several years. The current trustees had inherited the position from previous committees and were already trying to understand historic transactions and reconstruct records.
During our independent examination work, we repeatedly found transactions for which adequate supporting documentation couldn’t be produced. These weren’t isolated bookkeeping errors. Similar gaps appeared across successive accounting periods, covering both receipts and payments where invoices, receipts or other evidence were unavailable.
That raised a wider governance concern. Trustees need to be able to show not only that money entered or left the bank account, but why each transaction took place, that it was for the charity’s purposes and that it was properly authorised.
Independent examination is more than a compliance exercise
An independent examination isn’t an audit, but nor should it be treated as an administrative step needed to file the annual accounts. It can expose weaknesses in accounting records, internal controls and governance that trustees need to deal with.
In this case, our independent examination reports drew attention to gaps in the supporting documentation for a number of transactions, and we discussed the findings and their implications for financial control with the trustees.
The fact that similar problems recurred over several years mattered. One missing document may be an administrative slip. Repeated difficulty in showing the basis for transactions points to a more fundamental weakness in record keeping and control.
Going back to understand what happened
The work eventually went beyond preparing the annual accounts. The current trustees identified significant transactions from earlier periods, some from before they took office, that they couldn’t reconcile with the charity’s records.
We advised them on how to investigate: going back to original banking information, seeking documents and explanations from people involved at the time, considering whether proper authority had existed for the transactions, and checking the charity’s own governance requirements. Where records were incomplete, evidence had to be found from other sources where possible.
In historic investigations, it’s important to be clear about what each piece of evidence can prove. Evidence that a payment was made doesn’t establish why it was made or whether it was properly authorised. Bank statements and cheque copies confirm the transaction, but they don’t replace invoices, agreements, minutes, loan records or evidence of trustee approval.
Supporting the current trustees
We also had to separate historic weaknesses from the actions of the trustees who had inherited them. The current trustees engaged with the issues rather than ignoring them. They obtained historic banking information, contacted people previously involved with the charity, sought explanations from third parties and discussed the matters formally. They also started introducing stronger approval requirements for future spending.
Our role wasn’t to make unsupported assumptions about what had happened. It was to examine the evidence available, identify where evidence was missing, advise the trustees on strengthening controls and meet our own professional and statutory responsibilities where necessary.
When a financial issue becomes a governance issue
Eventually, our concerns went beyond individual missing records. Some historic transactions were significant in value, and despite further enquiries, documentation showing their purpose and authority couldn’t be obtained. Taken together with the recurring weaknesses found through successive independent examinations, this raised broader concerns about the charity’s historic internal controls and governance. It could no longer be treated as another item on a list of accounts queries.
As independent examiners, we had a statutory duty to report matters of material significance to the charity regulator. The UK charity regulators’ guidance, Matters of material significance reportable to UK charity regulators, explains this duty and what it covers. We therefore made a report to the Charity Commission.
The Commission later asked for more information about our findings, the wider financial control issues and the circumstances of the historic transactions. We gave a detailed response that kept what we had established through our own work separate from what the trustees had reported to us. Where records are incomplete, professional judgement means being clear about what the evidence proves and what it doesn’t.
Moving from investigation to improvement
Identifying historic weaknesses is only part of the answer. The more important question for today’s trustees is what needs to change so that similar problems are less likely to recur and concerns are spotted sooner. For charities, practical financial controls can include:
- keeping appropriate documentation for income and expenditure
- documented approval for significant transactions
- recording important financial decisions in trustee or committee minutes
- clear limits on delegated authority
- appropriate authorisation for higher value payments
- regular reconciliation of accounting records to bank accounts
- meaningful financial information for trustees
- records that let future trustees understand significant decisions and transactions.
For charities in England and Wales, the Charity Commission’s guidance Internal financial controls for charities (CC8) is a practical reference for reviewing controls alongside the charity’s own governing document.
Good governance leaves an audit trail. Years later, an independent examiner, a new trustee or the Charity Commission should be able to see why a significant transaction happened and how it was authorised, without having to piece events together from memories and incomplete records.
The wider lesson for trustees
New trustees shouldn’t assume historic problems no longer matter because they happened under a previous committee. Trustees aren’t automatically responsible for decisions made before they took office, but when concerns come to light, the current board does need to decide how to investigate and address them.
Nor should trustees be afraid of finding problems. Good governance isn’t shown by never finding anything wrong. It’s often shown by how trustees respond when something has gone wrong. The trustees in this case investigated historic issues, took professional advice, strengthened controls and engaged with the regulatory process, and that’s an important part of restoring accountability.
How ATS Accountants can help charities
Our work with charities goes beyond preparing annual accounts. Our approach is informed by director Shahed Alam’s charity audit and trustee experience spanning more than 20 years, including auditing charities at Big Four firms, advising on governance, delivering governance and fraud awareness training, and serving as a trustee. That gives us both an auditor’s view of financial controls and a first hand understanding of what trustees face in practice.
We support trustees with:
- charity accounts and independent examinations
- reviews of financial controls and record keeping
- governance and risk reviews
- investigating historic accounting issues
- responding to Charity Commission enquiries
- reporting obligations arising from independent examination
- practical improvements to financial procedures and trustee oversight.
For charities with long standing accounting or governance difficulties, the starting point doesn’t have to be perfect. What matters is identifying the weaknesses honestly, establishing the evidence, meeting regulatory responsibilities and putting better arrangements in place. Find out more about our charity accounting services.
If your charity has inherited accounting, governance or record keeping problems, contact ATS Accountants to discuss how we can help.