Navigating financial management challenges in the Scottish charity sector: insights and strategic approaches

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Adam Finkel-Gates University of Glasgow, UK

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This paper investigates financial management within Scottish charities, emphasising the challenges faced in external scrutiny, comparative financial information, and accounting practices. It employs a survey and a review by the Office of the Scottish Charity Regulator to assess impacts on smaller charities, highlighting issues with transparency and compliance. The study advocates for policy interventions and capacity building to improve sector resilience and transparency, thus enhancing effectiveness and sustainability in the voluntary sector.

Abstract

This paper investigates financial management within Scottish charities, emphasising the challenges faced in external scrutiny, comparative financial information, and accounting practices. It employs a survey and a review by the Office of the Scottish Charity Regulator to assess impacts on smaller charities, highlighting issues with transparency and compliance. The study advocates for policy interventions and capacity building to improve sector resilience and transparency, thus enhancing effectiveness and sustainability in the voluntary sector.

Introduction

The issue of financial management in the Scottish charity sector is not just a matter of internal efficiency but a significant policy concern impacting the credibility and effectiveness of the entire voluntary sector. A review by the Office of the Scottish Charity Regulator (OSCR) of 90 charities, representative of the sector’s income diversity but excluding certain categories like cross-border charities and higher education institutions, highlighted that a significant proportion of concerns related to accounting practices (OSCR, 2023a).

The review revealed recurring issues such as the absence or inadequacy of Trustees’ Annual Reports, insufficient external scrutiny, missing prior year comparative information, and a lack of necessary notes to the financial statements. Inspired by these findings, the study reported in this paper aims to delve deeper into the root causes of these reporting shortcomings.

The focus is particularly critical, as funders and stakeholders rely heavily on the accuracy and transparency of these financial reports for assurance that their resources are being utilised effectively and appropriately (Alsop and Morgan, 2019; Abnett and de Vries, 2022). Any discrepancies or shortcomings in these accounts can severely undermine trust and potentially jeopardise future funding opportunities (Ortega-Rodríguez et al, 2020). While this paper primarily focuses on the accounting practices within the Scottish charity sector, it’s crucial to recognise the broader implications of these practices on policy and public trust. Effective and transparent accounting practices are not just administrative necessities; they are vital for maintaining public confidence in the charitable sector (Cordery, 2013). Mismanagement or lack of clarity in financial reporting can lead to diminished public trust, which in turn affects the willingness of donors to contribute and policy makers to provide support (Lee, 2004).

The complexities of charity accounting, coupled with the varying levels of expertise and resources available to different organisations, present unique challenges (Connolly et al, 2013). Through a comprehensive survey, the authors aim to identify these challenges and understand the support charities most require in their accounting practices.

Moreover, the way charities manage their finances and report their activities directly influences policy decisions at various levels. Policy makers rely on accurate and transparent financial reporting to formulate regulations that ensure accountability and foster a supportive environment for the sector’s growth (Connolly and Hyndman, 2000). Therefore, the findings of the survey reported in this paper should be considered critical inputs for policy formulation. By improving financial reporting standards and practices, charities can demonstrate their commitment to accountability and efficiency, thus reinforcing their credibility and the public’s trust. This, in turn, can lead to more favourable policy frameworks, increased funding opportunities, and a stronger collaborative relationship between the sector and its stakeholders (Hyndman and McConville, 2018).

This practice paper aims to address two primary research questions that emerge from the findings of OSCR:

  1. What are the specific challenges faced by Scottish charities in the domains of external scrutiny, comparative financial reporting, and preparation of accounting notes?

  2. What strategies could effectively address the identified challenges in charity financial management and reporting?

This article primarily aims to explain the specific challenges faced by Scottish charities in achieving financial compliance and to identify the support mechanisms that can be established to enhance their financial management practices going forward. By concentrating on these research questions, we intend to deepen our comprehension of the hurdles confronting these charities, ensuring greater transparency and compliance across the sector.

The paper is organised into several key sections to address the financial management challenges faced by Scottish charities. Initially, the Methodology section details our survey methodology and selection of charities. This is followed by the Findings section, which examines the results related to external scrutiny, financial comparisons, and accounting notes. Recommendations are then provided to assist stakeholders, such as regulatory bodies and charities, in tackling these challenges. Finally, the paper concludes by highlighting the main insights and their importance for improving the sector’s financial management practices.

Methodology

We used a mixed-methods approach to examine financial practices among Scottish charities, specifically targeting those with annual incomes below £250,000, due to their unique regulatory compliance challenges. The income data for Scottish charities was sourced from the Charity Register available on the OSCR website (OSCR, 2023b). Eligibility for the survey was based on the public availability of an email address, with only those charities that could be contacted via email being invited to participate. Data collection was conducted via an online survey distributed between 6 and 30 November 2023. The survey featured a blend of quantitative and open-ended qualitative questions, aimed at uncovering the practices and challenges in external scrutiny, comparative information, and the preparation of notes to accounts as highlighted by the OSCR review.

To ensure the integrity and depth of our analysis, we undertook a rigorous thematic analysis of the qualitative responses. Data was anonymised at the collection point, with no personal or identifiable information collected, to maintain respondent confidentiality and adhere to ethical standards. Our thematic analysis process was initiated without preconceived themes, allowing for an organic emergence of categories based on the respondents’ narratives. Each response was manually coded in Excel, with a systematic approach to identifying and categorising common themes related to the challenges and practices in financial reporting. This coding process was conducted in small batches, with each set of data reviewed twice to ensure consistency and accuracy in theme identification.

Given the specific focus of our study, the researcher’s professional background in accounting was instrumental in accurately categorising responses and identifying themes, thus providing a nuanced understanding of the sector-specific challenges in financial management within the charitable sector. Additionally, consultations with charity executive officers were conducted to validate the thematic analysis, ensuring that the findings resonated with sector experiences and perspectives.

Our sampling strategy was primarily convenience-based, targeting charities that were considered digitally savvy, defined as those with an active website and a publicly available email address, making them easily reached via email. This approach inevitably skews our sample towards charities that are more engaged online, potentially excluding a significant segment of the sector that operates offline or with limited digital presence. Given the non-random nature of our sample, caution must be exercised when applying inferential statistics as our findings may not be universally applicable across the broader Scottish charity sector. Therefore, our results should be viewed as indicative of trends among this segment rather than definitive representations of the entire sector.

In alignment with our commitment to transparency and rigour in research, the complete survey instrument is included in the Appendix.

Survey demographics

Our approach to surveying 3,318 Scottish charities led to a set of responses that diverged from the broader sector’s financial landscape, as shown in Table 1. The survey’s sampling method resulted in a skew in representation across income brackets. Particularly, the smallest charities are underrepresented among survey respondents in comparison to their overall sector presence. This misalignment extends across other income levels, with an overrepresentation of charities within the £50,000 to £100,000 turnover range compared to their actual sector proportion.

Table 1:

Comparative overview of survey responses and sector demographics

Charity turnover £0-£10,000 £10,000-£25,000 £25,000-£50,000 £50,000-£100,000 £100,000 to £150,000 £150,000 to £200,000 £200,000 to £250,000 £250,000 plus
Sample 22% 17% 16% 20% 12% 8% 6% 0%
Respondents 20% 18% 18% 22% 8% 5% 4% 5%
Sector 40% 14% 10% 10% 5% 3% 2% 15%

While our findings underscore the sampling challenges inherent in a convenience-based approach that favoured charities with a more prominent digital presence, it is crucial to consider these factors when evaluating our results. Nonetheless, the survey provides considerable evidence of and insights into the financial management practices within parts of the Scottish charity sector. This highlights the considerable needs related to accounting practices even within this skewed sample.

Figure 1 illustrates the distribution of survey participants, segmented according to their financial turnover, and specified charitable objectives. Readers should interpret the survey results with an understanding that the comparative analysis between the Response Rate and the broader Charity Sector demographics highlights certain methodological constraints.

Presenting the survey's response rates, broken down by the size of the charity's financial turnover and the nature of their charitable work.
Figure 1:

Analysis of survey responses by charitable purpose and income bracket

Citation: Voluntary Sector Review 2024; 10.1332/20408056Y2024D000000021

Findings

External scrutiny

Scottish charities’ adherence to regulatory standards and their choice of financial scrutiny methods significantly depends on their income levels. Charities earning less than £500,000 annually are generally permitted to opt for an independent examination over a full audit, except when their constitution specifies the necessity of an audit (OSCR, 2019).

Table 2 presents the self-reported data on the types of external scrutiny used by charities. It’s important to interpret this data cautiously as our findings indicate that many charities may inaccurately use the term ‘audit’ for what are actually independent examinations. For instance, when we verified the reports of ten charities with incomes below £25,000 that claimed to conduct audits, we found that nine were actually conducting independent examinations. This confusion mirrors observations by OSCR, which has also noted discrepancies in the understanding of ‘audit’ and ‘independent examination’ terms among charities.

Table 2:

Overview of charities’ approaches to external financial scrutiny by income level

Charity income Volunteer independent examination Paid for independent examination Paid for audit
£0-£10,000 47.6% 29.8% 22.6%
£10,000-£25,000 46.2% 30.8% 23.1%
£25,000-£50,000 32.5% 46.8% 20.8%
£50,000-£100,000 26.1% 44.6% 29.3%
£100,000-£150,000 17.1% 57.1% 25.7%
£150,000-£200,000 9.1% 54.5% 36.4%
£200,000-£250,000 0.0% 46.7% 53.3%
£250,000+ 0.0% 50.0% 50.0%
Overall Share 31.4% 41.4% 27.2%

Our study revealed a moderate negative correlation (r = -0.310, p <.001) between charity income and the type of financial scrutiny employed, showing that as income increases, charities are more likely to transition from volunteer-led independent examinations to formal audits. Additionally, our survey observed a rise in the adoption of professional audits among charities with annual incomes above £50,000. This suggests a sector-wide progression towards more structured auditing processes as charities grow financially.

Thematic analysis of responses from charities with incomes between £0 and £25,000 shows that volunteers performing independent examinations often possess backgrounds in finance – accountancy, banking, financial advisory, and bookkeeping.

Comparative information

The OSCR report identified that several charities omitted prior year information from their accounts, either partially or entirely. An analysis of data from Table 3, which examines the difficulties charities encounter in presenting comparative financial information, unveils key trends.

Table 3:

Analysis of challenges in presenting comparative financial information across different income ranges

Income range None Understanding what needs to be compared Access to previous years’ data Time and response to compile the information Technical expertise
£0 - £10,000 39% 16% 7% 20% 18%
£10,000 - £25,000 46% 12% 1% 25% 15%
£25,000 - £50,000 46% 16% 4% 20% 13%
£50,000 - £100,000 46% 9% 4% 28% 13%
£100,000 - £150,000 40% 14% 2% 33% 12%
£150,000 - £200,000 44% 15% 0% 26% 15%
£200,000 - £250,000 50% 10% 5% 15% 20%
£250,000 plus 22% 11% 0% 44% 22%

Difficulties in understanding what needs to be compared were prevalent across all income ranges. Conversely, challenges related to accessing previous years’ data were minimal across all income groups, hinting at strong record-keeping practices among the charities.

The most challenging aspect is in terms of time and effort required to compile comparative financial information. Thematic analysis underscores a persistent challenge in technical expertise across all income levels, signalling a widespread gap in specialised financial management skills. This deficiency is particularly pronounced in the lower and middle-income brackets, suggesting a crucial need for targeted skill development in these areas.

The sector exhibits a consistent need for clarity in financial reporting, particularly regarding the specifics of what must be compared. Smaller charities, particularly those with annual incomes below £150,000, acutely feel this need due to resource constraints in hiring specialised personnel or investing in comprehensive financial systems.

The financial management landscape within the charity sector is complex. Charities show proficiency in essential areas, such as record-keeping, yet there is a clear need for improved support and education, particularly in comparative financial reporting. Many charities meet regulatory requirements by using standard reporting templates, like those from OSCR. This indicates that regulatory bodies significantly influence charities’ reporting practices.

The survey data reveals that Excel is widely used by charities for financial management and reporting, reflecting its accessibility and familiarity. As a key component of the commonly available Microsoft Office suite, Excel’s prevalence underscores its appeal as a cost-effective solution, especially beneficial for charities operating with limited budgets. However, the data also indicates a shift among some organisations from Excel to Xero, seeking more efficient comparative analyses, which points to a broader trend toward more specialised software as organisational needs evolve.

Notes to the accounts

The survey data, defined in Table 4, provides insight into how charities of various income sizes prepare the notes to their accounts, a crucial aspect of financial reporting.

Table 4:

Charities’ approaches to preparing the notes to their accounts by income level

Use a template from OSCR or similar body Use software to generate the notes Consult with an accountant Prepare to the best of the charity’s ability without formal guidance Other
£0 - £10,000 35% 2% 32% 24% 7%
£10,000 - £25,000 40% 4% 33% 19% 4%
£25,000 - £50,000 27% 4% 47% 19% 3%
£50,000 - £100,000 32% 3% 53% 11% 1%
£100,000 - £150,000 31% 0% 49% 11% 9%
£150,000 - £200,000 27% 0% 64% 9% 0%
£200,000 - £250,000 33% 0% 60% 7% 0%
£250,000 plus 20% 5% 70% 5% 0%

Across the smaller income brackets, the two favoured methods for preparing notes to accounts is the use of templates provided by bodies like OSCR and consulting with an accountant. The role of external consultation, particularly with accountants, becomes more pronounced as the income bracket increases. This is evident in the higher engagement of mid-range charities with external consultants, signifying the growing complexity of financial management in larger charities.

Interestingly, the data indicates that the direct preparation of notes without formal guidance, while less common, is still practised, especially among the smallest charities.

The survey uncovers varied approaches within the charity sector toward preparing the notes to the accounts, with some insights pointing to a potential gap in the adoption of specialised accounting software. Responses such as: ‘The transition has been very complicated as our bookkeeper was resistant to use accounting package due to lack of experience’, highlights the difficulties faced by charities when attempting to move away from familiar tools like Excel. This sentiment is echoed by other participants who explicitly state a preference for more traditional methods, as in: ‘We use an Excel spreadsheet for this work’, and ‘All transactions are stored on an Excel spreadsheet’. The reliance on external expertise is also apparent, with several charities deferring this task to professionals: ‘Leave it to the IE’, ‘Accountant does this’, and ‘This is prepared by our accountant’. These statements suggest that the sector’s hesitancy to fully embrace specialised software may stem not from a mere lack of options but from a combination of resource constraints, a comfort with existing processes, and the need for software that aligns with the sector’s unique requirements. The survey reflects that for many, ensuring financial compliance is still largely dependent on external resources, which could potentially shift attention and funding away from core charitable activities.

Table 5 examines how charities distinguish between restricted and unrestricted funds in their accounts, and reveals significant trends, including that many surveyed charities across all income brackets confidently include notes on the breakdown of income and expenses into restricted and unrestricted funds in their accounts. Confidence in reporting this distinction grows with the size of the charity. Notably, confusion and uncertainty are minimal, mostly contained within the smallest income brackets. However, a significant number of the smallest charities either do not include this breakdown or are unsure about it, indicating a potential gap in financial reporting skills or understanding within this segment.

Table 5:

Charities’ practices and confidence in segregating restricted and unrestricted funds by income range

Able to complete and are confident in the figures Able to complete but unsure over the accuracy We do not provide a breakdown Respondent was unsure if this is included
£0 - £10,000 49% 1% 26% 5%
£10,000 - £25,000 62% 2% 18% 2%
£25,000 - £50,000 68% 5% 11% 1%
£50,000 - £100,000 76% 2% 6% 2%
£100,000 - £150,000 80% 5% 3% 0%
£150,000 - £200,000 81% 0% 4% 0%
£200,000 - £250,000 74% 5% 0% 0%
£250,000 plus 69% 4% 4% 0%

Table 6 offers insights into charities’ confidence in adding notes to their financial accounts. It shows that, as a charity’s turnover increases, so does its confidence in the accuracy of its financial figures, up to a point. This trend indicates that higher-income charities probably have more resources or expertise, which helps them navigate the complexities of financial reporting more confidently.

Table 6:

Charities’ self-assessed competence in drafting notes to their accounts across different income categories

Able to complete confidently and accurately Able to complete but unsure over its accuracy Challenging due to a lack of clarity or understanding Unaware of the need to do so
£0 - £10,000 45% 4% 4% 16%
£10,000 - £25,000 54% 2% 6% 14%
£25,000 - £50,000 56% 4% 4% 17%
£50,000 - £100,000 59% 6% 3% 14%
£100,000 - £150,000 70% 7% 0% 7%
£150,000 - £200,000 71% 0% 0% 13%
£200,000 - £250,000 50% 19% 6% 0%
£250,000 plus 61% 4% 0% 9%

However, challenges and uncertainties are more apparent in smaller charities, particularly those with annual incomes below £50,000. In these income brackets, a noticeable number of charities either express uncertainty over the accuracy of their notes or find the task challenging due to a lack of clarity or understanding. Additionally, there are several charities, especially in the lower income brackets, that are unaware of the need to provide such notes.

Despite the concerns raised in the OSCR report, a significantly higher number of charities than expected reported confidence in producing notes to their financial accounts, as shown in Table 6. This unexpected result prompted further investigation into the sources of this confidence. Specifically, we isolated charities from Table 6 that reported confidence in their financial reporting and analysed their methods of preparing financial notes, as detailed in Table 4. This focused analysis, presented in Table 7, aims to uncover why these charities are confident in their reporting, examining the specific methods they employed.

Table 7:

Correlating confidence and accuracy in preparing notes to the accounts with employed methods, categorised by income ranges

Use a template from OSCR or similar body Use software to generate the notes Consult with an accountant Prepare to the best of the charity’s ability without formal guidance
£0 - £10,000 33% 0% 21% 6%
£10,000 - £25,000 38% 2% 25% 4%
£25,000 - £50,000 25% 6% 35% 10%
£50,000 - £100,000 24% 0% 45% 6%
£100,000 - £150,000 28% 0% 44% 8%
£150,000 - £200,000 19% 0% 52% 10%
£200,000 - £250,000 25% 0% 42% 0%
£250,000 plus 10% 5% 50% 5%

Notably, a considerable number of charities across different income brackets prefer using templates for their financial reports. These templates, particularly those offered by OSCR, feature built-in checks that flag discrepancies when the entered data does not match the summaries. This reliance on templates is especially marked among smaller charities, where the structured guidance and checks provided by such tools play a crucial role in enhancing their confidence. By simplifying and standardising the financial reporting process, these templates make it more accessible and manageable for charities, especially those with limited financial knowledge or resources.

In addition to the reliance on templates, consultation with professional accountants emerges as a crucial approach, especially for charities with higher incomes, from £50,000 upwards. This trend indicates that as charities grow and their financial operations become more complex, they increasingly seek the expertise of accounting professionals.

The adoption of specialised software for preparing notes is notably low across all income brackets. Echoing earlier observations regarding Excel, this pattern indicates that, especially among charities with lower incomes, there might be restricted access to or knowledge of these digital tools. Alternatively, these entities might perceive such software as overly complex or expensive compared to traditional methods like using templates or seeking professional consultations.

The thematic analysis of responses from charities across different income ranges on their approaches to preparing notes to the accounts reveals a diverse array of practices, including a notable trend among higher-income charities frequently mentioning the involvement of professional accountants, which indicates a reliance on external expertise. Interestingly, many charities, particularly those with lower incomes, report either not having restricted funds or not yet dealing with them. This could imply a simpler financial structure within these smaller charities, with a possible focus on unrestricted funding sources. It also suggests that the complexity of managing different fund categories, such as restricted and unrestricted funds, increases with the charity’s size and income.

Additionally, charities within the mid-income bracket report specific internal methods for monitoring and handling funds. Some of these organisations also mention carrying out distinct reviews for restricted accounts, suggesting a more advanced approach to financial management as the size of the charity increases.

However, a common pattern across charities of all income sizes is the lack of detailed explanation regarding the processes involved in fund categorisation. Responses that are brief and lack specifics, such as: ‘Done by accountant’ or ‘Built up when money received’, highlight a potential gap in detailed financial management involvement or understanding among some charities.

Considering our findings, it’s crucial to discuss how these insights translate into actionable strategies for the Scottish charity sector. The challenges in external scrutiny are not merely theoretical but have real-world implications for the accountability and transparency of charities. Smaller charities, in particular, can improve their practices by adopting more streamlined and guided financial management processes, which can be facilitated through collaborative efforts among charities and support from regulatory bodies. Extending beyond the individual organisations, policy makers and regulatory bodies can leverage these insights to tailor their guidelines and support systems, better meeting the needs of charities of varying sizes. This might involve developing more accessible training programmes, optimising financial reporting templates, and fostering a culture of continuous learning and adaptation, thereby enhancing the sector’s overall resilience and effectiveness.

However, implementing these changes will not be without challenges. Resource constraints, particularly in smaller charities, might hinder the adoption of new practices. To overcome these barriers, a multi-faceted approach involving policy support, technological innovation, and sector-wide collaboration is essential. This approach should prioritise not only compliance but also the efficiency and efficacy of financial management practices.

Recommendations

The real-world implications of challenges in external scrutiny demand actionable strategies for the Scottish charity sector. Our analysis spotlights the necessity for smaller charities to refine their financial management through simplified processes and underscores the broader sector’s need for targeted training and resources. This presents an opportunity for regulatory bodies and policy makers to adapt their support to the diverse requirements of charities, enhancing accessibility to training and optimising reporting frameworks.

Addressing these challenges requires a unified approach that leverages policy support, technological advancements, and sector-wide collaboration, focusing on both compliance and the effectiveness of financial management. This concerted effort promises to strengthen the sector’s financial integrity, transparency, and resilience.

For regulatory bodies:

  1. Develop clear and accessible guidelines: Enhance existing guidelines to make financial management practices more comprehensible, especially for smaller charities. This can include simplified language, practical examples, and step-by-step instructions.

  2. Regular updates to financial reporting templates: Continuously refine templates to ensure they are user-friendly and reflective of the evolving needs of charities of different sizes. This can help in standardising practices across the sector and reducing the complexities of financial reporting.

For universities, considering their civic mission and the goal to enhance local partnerships and impact:

  1. Specialised training programmes: Create and offer targeted training modules that address specific challenges identified in the study, such as external scrutiny and comparative financial reporting. These programmes should be made accessible to charities of all sizes and tailored to different levels of financial expertise.

  2. Research and development of financial management tools: Conduct research to identify gaps in current financial management tools available to charities. Develop and promote cost-effective and user-friendly digital tools that can simplify financial reporting and accounting processes.

For charities:

  1. Commitment to continuous learning: Encourage active participation in financial management training programmes. This should be a part of a broader culture of continuous learning and adaptation to changing financial reporting standards.

  2. Adoption of technology: Explore and implement appropriate financial management software to improve efficiency. Smaller charities should be provided with support in technology adoption, possibly through grants or partnerships. The Charity Digital Skills Report underscores the necessity for smaller charities to receive targeted support for technology adoption, advocating for funding mechanisms, such as grants or partnerships, to cover essential digital costs and bridge the digital skills gap (Amar and Ramsey, 2023).

  3. Collaboration and knowledge sharing: Engage in partnerships with other charities for resource sharing, mentorship, and best practices exchange. This can include joint training initiatives, shared use of financial management tools, and regular sector-wide forums for discussion and learning.

Implications for policy makers:

Policy makers should recognise the varying needs of charities based on their size and resources. Policies should be formulated to support smaller charities in overcoming financial management challenges without overburdening them with complex requirements. This could involve differentiated reporting standards or dedicated support mechanisms for smaller charities. For instance, the widespread confusion among smaller charities regarding ‘audit’ and ‘independent examination’ terminology not only affects compliance but also has broader policy implications. A concrete example of potential policy significance is the development of targeted educational programmes and clearer regulatory guidance. Such initiatives could help demystify financial reporting requirements, ensuring that charities, irrespective of their size, can meet their obligations more effectively.

Conclusion

This study offers critical insights into the financial management challenges faced by Scottish charities, with a particular focus on the nuanced difficulties encountered by organisations of various sizes. Through an examination that aligns with observations from the OSCR review, we’ve uncovered a landscape marked by both commitment and complexity, spotlighting the acute need for strategic support and intervention.

Our survey reveals that the intensity of financial management challenges is closely linked to the charity’s scale of operation. Smaller entities often grapple with the dual hurdles of limited financial literacy and scarce resources, leaning heavily on volunteer-led mechanisms and external examinations. On the flip side, larger organisations, while benefiting from bought professional services, navigate the intricate demands of comprehensive financial oversight.

Tackling these challenges involves a two-pronged strategy that focuses on immediate practical issues and overarching structural needs. We recommend a harmonised approach that combines enhancing regulatory guidelines with strengthening educational programmes. These efforts should strive to simplify financial reporting procedures, ensuring they are straightforward and manageable for charities of all sizes and capacities.

Furthermore, the journey towards enhanced financial stewardship in the charity sector necessitates embracing a culture of continuous improvement and technological leverage. Encouragingly, our findings suggest that access to specialised training and professional expertise significantly boosts confidence in financial reporting, underscoring the value of external knowledge and resources.

In response to the pressing challenges identified, our recommendations advocate for a collaborative ethos among charities, regulatory bodies, and educational institutions. By streamlining financial guidelines, enriching training programmes, and fostering a shared repository of best practices and technological tools, the sector can embark on a transformative journey towards greater financial transparency and efficacy.

Ultimately, this study not only defines the current state of financial management within Scottish charities but also charts a course for future development. By proactively addressing the identified challenges through targeted actions and cooperative initiatives, the sector can fortify its financial health, ensuring its capacity to uphold public trust and effectively serve the community.

Funding

This work was supported by the Charity Finance Office Limited, which provided funding for the purchase of contact details for the charities involved in this study.

Declaration of AI usage

In the preparation of this manuscript, AI tools were employed to assist with improving the clarity and readability of the text. The use of these tools was limited to grammatical corrections and sentence structure optimisation. I retain full responsibility for the content’s originality and accuracy, ensuring that the manuscript adheres to the ethical standards required by Bristol University Press.

Conflict of interest

The author declares that there is no conflict of interest.

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Appendix: Survey questionnaire

Demographics and background

  1. What is the annual income range of your charity?

    1. £0 – £10,000

    2. £10,000 – £25,000

    3. £25,000 – £50,000

    4. £50,000 – £100,000

    5. £100,000 – £150,000

    6. £150,000 – £200,000

    7. £200,000 – £250,000

    8. £250,000 plus

  2. Which sector best describes your charity’s primary area of work?

    1. The advancement of education

    2. The advancement of health

    3. The advancement of citizenship or community development

    4. The advancement of arts, heritage, culture or science

    5. The advancement of public participation in sport

    6. The provision or recreational facilities, or the organisation of recreational activities, with the object of improving the conditions of life for the persons for whom the facilities or activities are primarily intended

    7. The advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity

    8. The advancement of environmental protection or improvement

    9. The relief of those in need by reason of age, ill health, disability, financial hardship or other disadvantage

    10. The advancement of animal welfare

    11. Any other purpose that may reasonably be regarded as analogous to any of the preceding purposes

  3. Where does your charity primarily provide its services?

    • National

    • Aberdeen City

    • Aberdeenshire

    • Angus

    • Argyll and Bute

    • City of Edinburgh

    • Clackmannanshire

    • Dumfries and Galloway

    • Dundee City

    • East Ayrshire

    • East Dunbartonshire

    • East Lothian

    • East Renfrewshire

    • Eilean Siar (Western Isles)

    • Falkirk

    • Fife

    • Glasgow City

    • Highland

    • Inverclyde

    • Midlothian

    • Moray

    • North Ayrshire

    • North Lanarkshire

    • Orkney Islands

    • Perth and Kinross

    • Renfrewshire

    • Scottish Borders

    • Shetland Islands

    • South Ayrshire

    • South Lanarkshire

    • Stirling

    • West Dunbartonshire

    • West Lothian

  4. How many full-time equivalent (FTE) staff members are involved in your charity’s operations?

  5. How many volunteers are involved with your charity’s operations?

External scrutiny

  1. 6.What type of external scrutiny does your charity’s financial reporting receive?
    1. Full audit by a certified accountant

    2. A paid third-party qualified individual performs an independent examination

    3. A volunteer qualified individual associated with the charity carries out an independent examination

  2. 7.Describe the process and frequency of external reviews or audits your charity undergoes. If possible, please specify who conducts these reviews and their qualifications.

Comparative information

  1. 8.What challenges does your charity face when providing comparative financial information? (Select all that apply)
    1. None

    2. Understanding what needs to be compared

    3. Access to previous years’ data

    4. Time and resources to compile the information

    5. Technical expertise to ensure accuracy

  2. 9.In your annual financial reports, how do you present comparative information from the previous year? Please describe any challenges you encounter in this process.

Notes to the accounts

  1. 10.Which of the following best describes how your charity prepares the notes to the accounts?
    1. We follow a template or guidance from OSCR or another body with no external professional support

    2. We use software that generates the notes automatically with no external professional support

    3. We consult with an accountant or external examiner

    4. We prepare them to the best of our ability without formal guidance

  2. 11.Do your accounts include notes that break down income and expenses into restricted and unrestricted funds?
    1. Yes, and we are confident in their accuracy

    2. Yes, but we are unsure about their accuracy

    3. No, we do not include this breakdown

    4. I am not sure if our accounts include this

  3. 12.When completing the Notes section of your financial statements, particularly the information found on the OSCR template ‘Additional Analysis pages 1, 2, and 3’, which statement best describes your experience?
    1. We are able to complete all Additional Analysis pages confidently and accurately

    2. We complete the Additional Analysis pages, but we are unsure about their accuracy and completeness

    3. We find it challenging to complete the Additional Analysis pages due to a lack of clarity or understanding

    4. We have not been completing the Additional Analysis pages as we were unaware of this requirement

    5. We do not complete the Additional Analysis pages because they do not apply to our charity’s financial situation

  4. 13.Discuss how your charity approaches the preparation of notes to the accounts, particularly the separation of restricted and unrestricted funds. Include any tools or resources you utilise and the difficulties you face.

Training and support needs

  1. 14.What areas of financial management would you like to receive training in? (select all that apply)
    1. None

    2. External scrutiny and audit processes

    3. Preparing comparative financial information

    4. Developing notes to the accounts, including fund categorisation

    5. General financial reporting and compliance

    6. Use of financial software and tools

  2. 15.How much is your charity able to allocate for financial management training over the course of a year?
    1. Nothing, we rely solely on free resources and volunteer support

    2. Up to £100

    3. £101 to £500

    4. £501 to £1,000

    5. Over £1,000

    6. We have not set a budget for training

  3. 16.What type of financial management training has your charity received, if any? Highlight areas where additional training could be beneficial.

  • Figure 1:

    Analysis of survey responses by charitable purpose and income bracket

  • Abnett, H. and de Vries, R. (2022) How transparent are charitable foundations? A large-scale comparison of transparency levels in grant-making trusts and foundations in England and Wales, Voluntary Sector Review, early view. doi: 10.1332/204080521x16681854150102

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  • Alsop, E. and Morgan, G.G. (2019) Financial reporting by smaller charities: drivers of the cash/accruals choice, Public Money & Management, 41(3): 22535. doi: 10.1080/09540962.2019.1689653

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  • Amar, Z. and Ramsey, N. (2023) Charity Digital Skills Report 2023, https://charitydigitalskills.co.uk/wp-content/uploads/2023/07/Charity-Digital-Skills-Report-2023.pdf.

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  • Connolly, C. and Hyndman, N. (2000) Charity accounting: an empirical analysis of the impact of recent changes, British Accounting Review, 32(1): 77100. doi: 10.1006/bare.1999.0124

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  • Connolly, C., Hyndman, N. and McConville, D. (2013) UK charity accounting: an exercise in widening stakeholder engagement, British Accounting Review, 45(1): 5869. doi: 10.1016/j.bar.2012.12.006

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  • Cordery, C. (2013) Regulating small and medium charities: does it improve transparency and accountability?, Voluntas: International Journal of Voluntary and Nonprofit Organisations, 24: 83151. doi: 10.1007/s11266-013-9381-6

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  • Hyndman, N. and McConville, D. (2018) Trust and accountability in UK charities: exploring the virtuous circle, British Accounting Review, 50(2): 22737. doi: 10.1016/j.bar.2017.09.004

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  • Lee, M. (2004) Public reporting: a neglected aspect of nonprofit accountability, Nonprofit Management and Leadership, 15(2): 169185. doi: 10.1002/nml.60

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  • Ortega-Rodríguez, C., Licerán-Gutiérrez, A. and Moreno-Albarracín, A.L. (2020) Transparency as a key element in accountability in non-profit organisations: a systematic literature review, Sustainability, 12(14): 5834. doi: 10.3390/su12145834

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  • OSCR (Office of the Scottish Charity Regulator) (2019) Section 3: eligibility for independent examination, https://www.oscr.org.uk/guidance-and-forms/independent-examination-a-guide-for-independent-examiners/section-3-eligibility-for-independent-examination/.

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  • OSCR (Office of the Scottish Charity Regulator) (2023a) Reviewing charity accounts: random sampling report, https://www.oscr.org.uk/media/4564/reviewing-charity-accounts-random-sampling-report.pdf.

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  • OSCR (Office of the Scottish Charity Regulator) (2023b) Charity register download, https://www.oscr.org.uk/about-charities/search-the-register/charity-register-download/.

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Adam Finkel-Gates University of Glasgow, UK

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