Chapter 7 - Accountability and regulatory environment
In this section:
Accountability
NFPs in partnerships with corporations tend to understand and embrace the accountability that corporate executives have to stakeholders and the wise investment of their funds.
The Centre’s work with corporations on corporate community investment (Centre for Corporate Public Affairs 2007) indicates accountability — and especially fiscal accountability — is an important feature of successful relationships between NFP organisations and business, especially public companies.
The more each partner is seen to be accountable, the more trust and authority will be placed in the partnership.
One NFP leader put their view about accountability forcefully:
NFPs need not only to recognise but actually support the fact that successful partnerships require dedicated and ongoing resourcing and servicing. They need to accept that money from corporates comes with strings attached and that there is an obligation for the NFP to perform in terms of the agreement they made when the money was sought and secured…In many NFPs there is not a culture within the services areas of taking responsibility for ensuring the fulfilment of program deliverables following corporate investment in the program. NFP accountability should span all parts of its business including service delivery areas — program KPIs should include specific targets regarding the achievement of contractual deliverables to the corporate funder.
Respondents to our survey indicate that NFP organisations rarely experience problems with accountability, measures of effectiveness of programs and mutual performance obligations with their partners (see Figure 7.1).
Fig 7.1: Accountability – not-for-profit sector issues when working with business
Survey question: We find when working with business that we rarely have issues around agreement on:
Source: Centre for Corporate Public Affairs, Survey of NFP organisations 2008. Note: The response categories ‘strongly agree’/‘agree’ and ‘strongly disagree’/’disagree’ are combined in this graph.
Our research with NFPs and corporations suggest entities from both sectors agree the not-for-profit sector is becoming more accountable — including by ensuring the qualifications of the board representatives are appropriate and adequate. As one participant noted:
Accountability grows on itself. Organisations are, at a minimum, expected to report whatever they did the year before better.
However, there are still many challenges. Not-for-profit organisations are perceived to advance the public good in various areas, but it is sometimes difficult to measure or quantify outcomes in relation to the intangible aspects of common good being pursued. Accordingly, it is frequently difficult also to demonstrate accountability to partner organisations and other stakeholders, including members, supporters and employees.
Box 7.1 summarises some of the factors influencing accountability in the not-for-profit sector, many relating to the voluntary nature of Boards and difficulties around measurement.
FACTORS INFLUENCING NFP SECTOR ACCOUNTABILITY
The most pressing factors influencing accountability in the not-for-profit sector are:
- complexities of legal structures and definitions under which a NFP organisation may fall, which remains unclear in terms of consistent and appropriate reporting standards
- difficulties attracting Board members with appropriate financial, legal or management expertise and detailed knowledge of the sector
- the voluntary nature of not-for-profit boards and responsibility to multiple internal and external stakeholders impedes good governance
- Board members nominated by an interest group may have a conflict of interest between the expectations of their nominee and the best interests of the NFP organisation
- decreasing levels of trust towards NFP organisations and cynicism about the motivations of their partnership with businesses.
The following three factors may also hamper the accountability of individual not-for-profit organisations:
- difficulties of measuring unquantifiable social goals — whereas the business sector has well-established reporting indicators, the non-profit sector does not — and has come up against fierce criticism. Anheier attempts to identify the NFP ‘bottom-line’, seeking to determine the central raison d’être of a NFP organisation and possible methods of measurement
- chronic lack of resources, including a failure to train management and staff in reporting requirements. Often, the Board of a NFP, which is responsible for the financial matters of an organisation, does not have the expertise to adequately administer finances
- different reporting requirements from different corporate partners add a significant burden.
Source: Ramsay et al .2004; Seitanidi & Ryan 2007; Anheier 2000, p. 6; The Urban Institute 2006.
Financial and accounts reporting
Disclosure is a fundamental precondition for accountability.
There are different dynamics and legal obligations to disclose information in the not-for-profit, and in the business sector. These differences (including those noted earlier in this report) represent a challenge for NFP-business relationships.
This reinforces our earlier finding that better business understanding of NFPs and the outcomes they can produce will assist corporate partners garner insights into some of the difficulties in capturing social outcomes and social innovation created over time.
Many not-for-profit organisations — as well as some commentators in the wider community — are concerned the absence of a national NFP reporting standard or requirement means that there is also insufficient information available about the effectiveness of individual NFP organisations and programs, and stewardship of community resources used, including when these resources comprise public monies or public company shareholder funds.
During our consultations some larger not-for-profit organisations voiced concern that the perceived lack of accountability in their sector means stakeholders and business partners are unable to make an adequate evaluation of their performance, particularly in comparison with other NFP organisations.
There is currently no uniform framework to guide reporting of financial and accounting information by the NFP sector.
Reporting requirements differ according to the various pathways to incorporation taken by NFP organisations (Institute of Chartered Accountants in Australia 2006). National regulation bodies not only operate different procedures, requirements and regulatory laws, but have no jurisdiction over State and Territory NFP associations.
A report by Allen Consulting Group (2005) identified some key areas requiring improved consistency:
- accounts and financial reporting requirements — there are differences in the types of organisations required to lodge accounts, and whether these accounts must be audited
- distribution of surplus assets — procedures for disposing surplus assets
- reporting requirements to government — reporting requirements and procedures for expenditure of public funds are rarely aligned across government agencies
- reporting standards to corporate stakeholders — current stakeholder reports provide limited information on key measures and best practices, hindering effective performance comparisons across the NFP sector.
Efforts have been made to improve consistency and streamline reporting standards across Federal, State and Territory jurisdictions. The Australian Accounting Standards Board (Australian Accounting Standards Board 2007) released a draft paper proposing to adopt national accounting standards for NFP organisations.
If implemented, the proposal will bring the Federal system in line with practices in the Australian States of assessing NFP organisations using a multi-tiered system based on the economic significance of an organisation.
CPA Australia has argued the definition of a not-for-profit organisation used by the Australian Accounting Standards Board is inadequate, and leads to confusion (particularly when a NFP discontinues operations), and provides opportunities for some NFPs to evade full disclosure.
Some commentators have noted Australia’s NFP sector does not have adequate reporting and accountability for disclosing reserves, investments, and salaries of senior management (Gettler 2007).
Consultations for this report involved some not-for-profit organisations (especially those operating nationally and across state borders) indicating they were keen to see Australia harmonise NFP reporting requirements across States and Territories, and ideally realise a national system of standards, accountability and reporting.
The Senate Standing Committee on Economics (2008) is currently inquiring into the disclosure regimes for charities and not-for-profit organisations, with a report expected in November 2008. Among other terms, the inquiry will examine models of regulation and other measures that would improve or assist NFP accountability, governance and management.
Reporting to business
NFP organisations report that over recent years corporate partners expect more sophisticated accountability and reporting. This can place significant compliance costs on NFPs, particularly smaller organisations, but there was an appreciation among most NFPs that such requirements were necessary, and often far less onerous than those required by government to account for program monies and grants.
Expectations to be more accountable are understandable. It just means we need to be really organised, and need to be more automated.
It makes us run departments in a more sophisticated way…It allows us to understand if we are doing our job.
Instead of talking about benefits, we now talk about KPIs and monthly reviews which fits in with our partner’s business…We are using the same language.
As a result of the increase in reporting, we have become a lot more outcome-driven. It changes how we do evaluations…It costs more but we build it into the partnership funding.
Our research for this report, and our work with companies and their CSR and corporate community investment strategies over many years, concludes that increasingly, the business sector has specific reporting requirements and a strong sense of their own stewardship of resources spent on community involvement. This leads to increased accountability expectations of not-for-profit partners.
Larger companies frequently find it easier to partner with medium and large NFP organisations, because, amongst other things, these organisations tend to have a capacity and capability to report adequately. Corporations often equate reporting and accountability capacity as ‘professionalism’.
Most NFP organisations that participated in data collection for this report indicated service provision in the not-for-profit sector is increasingly underpinned by reporting requirements.
Some NFP organisations believe stringent reporting requirements make the not-for-profit sector more ‘sophisticated’, and provide a new level of analysis that allows them to better understand the outcomes of their programs, and manage more effectively.
Although reporting is nevertheless considered a ‘burden’ by most not-for-profit organisations regardless of size, some have found ways to use reporting to enhance the reputation of their organisation.
Comments from research workshops include:
We over-report... to [satisfy our business partners and] demonstrate that 90 per cent of all donations go towards the cause, not administration or marketing.
Reporting is about relationship building. We give tangible reporting in order to promote relationships in the future, in order to market the organisation over and above other NFPs.
Small NFP organisations are uncomfortable with what they see as new and more stringent requirements from business for reporting around partnerships with business, and feel they are unable to justify associated administration costs, and allocation of scarce resources to reporting.
These smaller organisations may be well served to assist them meet reporting requirements by corporate partners — and business — by having access to, and being more aware of, frameworks for reporting, either via peak sectoral bodies or a national portal offering relationship identification, stewardship and evaluation and reporting tools.
It is now common for businesses and larger not-for-profit organisations to build reporting requirements into partnership agreements. However there is no common reporting template. There is also a difficulty determining what results or indicators to report, and how to report them.
Comments about reporting requirements from research workshops included:
KPIs and reporting is getting increasingly onerous.
Some companies are wonderful. Some companies want onerous reporting.
Reporting requirements for government are just as rigorous as for companies. There has been a big shift in government relations to increase accountability requirements. Hopefully this new Federal Government will look at outcomes.
Regulatory environment
The difficulties posed by disparate regulatory requirements imposed on NFPs, including those operating across several State and Territory jurisdictions, has been cited already in this report.
Many NFPs argue — as do corporations — that Australia’s size as a relatively small nation, and the array of different State, Territory and national arrangements regulating NFPs, creates an opportunity to examine existing arrangements and question if they can be reformed to allow NFPs to more readily achieve societal outcomes.
The NFP legal entity
A number of NFP organisations have raised the issue of the legal forms available for NFPs.
This is said to be of concern to senior business executives and company directors who are playing an important role on the Boards of many NFPs, and who are very conscious of their legal obligations and professional reputations as directors. It is claimed that what is considered inappropriate levels of legal compliance (a large proportion of NFPs being small and not subject to the same level of scrutiny as public trading entities, but governed by the same laws) is a current and potential inhibitor to business participation on not-for-profit Boards.
Current NFP entities include incorporation under State or Territory incorporation Acts, registration as a company limited by guarantee, and organisations incorporated by statute.
Organisations conducting activities across State and Territory borders are required to register with ASIC, most frequently as a company limited by guarantee, regardless of size.
NFPs and business leaders concerned about this have raised a proposal for a new NFP legal status, which requires limited financial and non financial reporting obligations in accordance with the organisation’s purpose and risk, reduces duties of directors and officers to the standard of ‘sensible, reasonable behaviour’ rather than those imposed on trading enterprises, and provides potential for national coverage.
While it goes beyond the scope of this study to pursue the matter further, the NFP legal status model employed in New Zealand has been cited with approbation. In discussions for this study, some for-profit company directors, and some NFPs in which they are active, believe an innovative approach to legal entity reform would encourage and make more valuable business engagement in NFP leadership.
Fundraising regulation
All NFP fundraising activities are regulated under the State and Territory governments, each operating their own registration and reporting regimes. The relevant legislations and regulatory bodies appear in Table 7.1.
RELEVANT LEGISLATION AND REGULATING BODIES
Jurisdiction |
Relevant Legislation |
Regulating Bodies |
|---|---|---|
Australian Capital Territory |
Lotteries Act 1964 Charitable Collections Act 2003 |
ACT Gambling and Racing Commission |
New South Wales |
Charitable Fundraising Act 1991 |
NSW Office of Liquor, Gaming and Racing, Department of the Arts, Sport and Recreation |
Northern Territory |
Gaming Control Act |
Licensing and Regulation Division, NT Department of Justice |
Queensland |
Collections Act 1966
Charitable and Non-Profit Gaming Act 1999 |
Department of Justice and Attorney-General, Queensland |
South Australia |
Collections for Charitable Purposes Act 1939 (CCP Act) |
Office of the Liquor and Gambling Commissioner |
Tasmania |
Gaming Control Act 1993 |
Liquor and Gaming Branch, representing the Tasmanian Gaming Commission |
Victoria |
Fundraising Appeals Act (Vic) 1998 (Fundraising Act) |
Consumer Affairs Victoria, Department of Justice |
Western Australia |
Charitable Collections Act 1946 |
Department of Consumer and Employment Protection |
Source: Australian Taxation Office 2008.
Under existing arrangements, identical fundraising activities may be subject to different definitions, governance, reporting, and tax requirements depending on their State jurisdiction. NFPs say such regulatory inconsistencies hinder national fundraising activities.
Any future consideration to encourage NFPs to develop and operate more effectively needs to question if existing regulatory arrangements, including those relating to fundraising, are helping or hindering the operation of NFPs.
Taxation
Our research for this report did not identify existing taxation arrangements for NFPs in Australia as a pressing operational or public policy issue acting as a barrier to corporate community partnerships.
However, many NFPs believe it would be beneficial if corporations generally had a clearer view of the taxation treatment of NFP organisations, which is why we have provided a brief overview of not-for-profit taxation arrangements in Australia.
Most nations require not-for-profit organisations to apply for official not-for-profit status. In this way, governments are able to maintain a register of NFP organisations operating within their borders for official purposes, such as special taxation treatment.
Not-for-profit tax exemption status in some jurisdictions is an important factor in NFP organisations attracting funds.
In Australia, there is no centralised system of government recognition for NFP status. Instead, the Australian Taxation Office advises NFP organisations to self-assess their status and submit a written statement for an endorsement of tax exemption (ATO 2007).
Furthermore, Australian organisations with tax-exempt status are not required to file a tax return. This helps to limit accountability and data collection for the not-for-profit sector (Lyons 2003).
Absence of clear definitions and regulatory procedures at the Federal level means NFP organisations may not be receiving the appropriate tax exemptions. It also burdens small or sub-groups to defend their NFP status in the courts.
According to the Australian Taxation Office (2007), NFP organisations can be categorised as Public Benevolent Institutions (PBIs); Income Tax Exempt Charities; Income Tax Exempt Funds; Health Promotion Charities or NFP Companies. Depending on the NFP category and the nature of their operations, organisations may be entitled to income tax exemption, GST charity concession, fringe benefits tax (FBT) rebate, or FBT exemption.
Not-for-profit organisations are also subject to tax law at the State and Territory level through payroll tax and land tax. Generally, once qualified as a NFP entity within their jurisdiction, organisations are generally exempt from state taxes (Allen Consulting Group 2005).
While most States and Territories apply similar criteria as the Australian Government in this regard, there are some inconsistencies between jurisdictions, making it possible for an organisation to be eligible for exemptions in some jurisdictions, but not others.
Regulatory harmonisation
As noted in this chapter, NFP organisations face financial and administrative challenges arising from different regulatory regimes and accounting standards. Several NFP bodies and NFP-related studies support establishing one national legal regulatory framework in Australia, to simplify national and state laws affecting the NFP sector.
The 2004 Reforming Not-for-Profit Regulation report (Ramsay et al 2004) recommended establishment of a single regulatory regime, that the role of Australian Securities and Investment Commission — the current not-for-profit sector regulator — be modified, and a NFP advisory body be founded.
The report recommended also that small NFP organisations include in their reports, matters such as financial statements, description of activities undertaken and objectives achieved, as well as employee remuneration information.
Some participants in the Centre’s workshops were sceptical about the benefits of a unified national legislative regime or framework to govern the activities of the NFP sector — in the same way the national companies code and the Australian Securities and Investment Commission does for corporations.
The following comment during a research workshop was typical of their views:
It is hard enough getting agreement across the Commonwealth and the States on any issue, never mind a national NFP governance code. Perhaps the best we can hope is harmonisation of existing state and territory legislation. But good luck, and don’t hold your breath.
However, there was strong support among most NFP organisations operating across State and Territory borders for a single, united governance code for NFPs.
The perceived benefits of such an arrangement were:
- a single standard for the NFP sector, allowing for uniform NFP staff training around legal governance as well as accountability. It was agreed this would enhance NFP compliance skills nationally
- less ‘red-tape’ and ‘Balkanisation’ of NFP resources and efforts when seeking to comply with different State and Territory standards if the NFP operates across borders
- greater community understanding of NFP governance and legal compliance, focused on a single system of NFP legal administration and legislative requirements
- a national — or at least harmonious — system of legislative requirements across States and Territories, placing the governance of NFP organisations on the same national footing as corporations, thus engendering greater community confidence in the administration of NFP organisations.
This is a matter worthy of further consideration by the Council of Australian Governments. As noted in Chapter 2 (Government Initiatives) some of these issues are being pursued by governments, including a recently announced plan by the Victorian Government to reduce the regulatory burden and support reform.
Comments from research workshop participants posit a range of views.
We don’t think there should be a national legislative approach. The majority of NFPs are SMEs and this would not be politically saleable. Even if it did happen, the rich charities would get richer and the poor get poorer.
Harmonisation, and at the best, standardised national legislation, would put everyone on the same footing, and would be a big boost to the standing of the not-for-profit sector in the community.
Chapter summary
- NFP organisations rarely experience problems with their corporate partners around accountability, measuring the effectiveness of programs, and mutual performance obligations
- NFPs and corporations believe that the not-for-profit sector is becoming more accountable. However many NFPs support more widespread transparency via voluntary or even mandatory reporting by NFPs, as a means of raising transparency across the whole sector. They believe this will most likely result in more businesses willing to partner with not-for-profit organisations
- NFPs have noted that business partners expect more sophisticated reporting and accountability from their community partners
- There is a strong mood among many NFPs for harmonisation of differing not-for-profit regulatory regimes across the nine State, Territory and Commonwealth jurisdictions. They believe harmonisation, or a national regulatory code for NFPs similar to that for corporations, would reduce administrative burdens and engender more community confidence in all NFP organisations
- There is concern that the basis of legal entity for NFPs discourages some business executives to sit on the Boards of NFPs because they face the same liability as directors of corporations
- Different fundraising regimes across the States and Territories should be reviewed to examine if the eight regulatory systems are hampering the ability of NFPs to raise funds