Financial accountability and sustainability for NFPs



The need for greater transparency and accountability within the NFP sector has been a topic of much debate in Australia in recent years. This has occurred at many levels within the sector including within organisations themselves and throughout the broader community. Further, at the political level there has been a strong focus on regulatory reform. This is both driven by and impacting on changed expectations for sector organisations in relation to transparency, accountability and sustainability reporting, albeit within what is currently a very uncertain and changing regulatory environment.

These changed expectations are arising for reasons which include:

  • The increasing significance of the sector within the economy;
  • Greater expectations of funders and donors;
  • The transfer of services from government to the sector;
  • Changing funding and service delivery models;
  • The demands of collaboration across sector organisations;
  • The growing governance expectations of the community for all organisations; and
  • The increasing regulatory obligations.

Given these expectations, one important matter that I believe has received too little attention to date is around the applicable reporting framework. It is clear that many in the sector are of the view that the current financial reporting framework as promulgated by the Australian Accounting Standards Board (AASB) is both inappropriate and inadequate for the NFP sector in addressing its unique characteristics and needs, many of which differ enormously when compared to for profit organisations.

As the primary focus of the current AASB framework is on the measurement of profit for the benefit of owners and shareholders, it is clear that it does not address, in any effective manner, the altruistic role of NFPs in our community.

The table below highlights some of the deficiencies of the current framework as well as a number of the issues to be addressed within an appropriately formed NFP framework. 

Current AASB Framework

 

NFP Reporting Requirements

 

Generating profit for shareholders

Diversity of revenue streams to fund programs

Ability to pay dividends

Sufficiency of reserves to maintain programs

Market values of assets

Leveraging assets to increase impact

Costs in terms of their nature and function

Achieving social objectives

In recognising these current inadequacies, it is vital that a comprehensive financial reporting framework be developed over time that specifically addresses NFP sector needs, allowing the sector to deal more effectively with the community’s heightened transparency expectations.

The core elements of good reporting include consistency and comparability across organisations. The absence of an agreed framework, encouraged through voluntary/self-regulatory codes or enforced via statutory arrangements, will invariably see a wide diversity of approaches taken and therefore limiting the achievement of these core objectives.

These matters are being lost in the current debate around regulatory frameworks and the role and obligations of NFPs in society. Unless the current regulatory issues are resolved, it is highly unlikely that these broader transparency expectations will recede. Therefore the need to develop a reporting framework for NFPs involving objective measures of their altruistic impact and sustainability arrangements will continue to be an important issue in the sector.

The difficulties encountered in resolving the current impasse over the ACNC regulatory framework for the charity sector and the absence of progress towards a more effective national framework for fundraising leaves one with little confidence that an appropriate NFP financial reporting framework can be established anytime soon. Nevertheless, it is an important matter for the sector and its representative organisations to be engaged in. With increasing international debate on appropriate financial reporting frameworks for NFPs it is an issue likely to see far greater focus across the sector in the coming years.

Joe Shannon
Partner, NFP and Education        
Moore Stephens

NFP Program Partner - Moore Stephens

The opinions in this article do not necessarily represent the views of the Australian Institute of Company Directors. Every effort has been made to ensure accuracy, but no responsibility is accepted for errors.

NFP Thought Leadership Program

We remain committed to assisting the NFP sector in achieving its goals through good and appropriate governance. As part of this commitment we have launched our national NFP Thought Leadership Program. This program, utilising the insights of many leaders across the NFP sector, will provide a range of resources and content which can be accessed online or in person at our various events. Moore Stephens are proud to support our national NFP Thought Leadership Program as a valued program partner.

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