Introduction
For board members of not-for-profit (NFP) and charity organisations, strong financial oversight is a core component of their governance responsibilities. This duty is essential for maintaining compliance with the Australian Charities and Not-for-profits Commission (ACNC) Governance Standards, which are designed to ensure transparency, accountability, and public trust in the sector.
Fulfilling these financial responsibilities requires a clear understanding of both strategic direction and regulatory obligations. This guide provides practical measures for board members and finance teams to establish a sound governance framework, oversee financial reporting, and manage risks effectively, aligning their practices with the standards required by the ACNC and the Australian Taxation Office (ATO).
Understanding Core Financial Responsibilities for NFP Board Members
Setting the Organisation’s Financial Direction & Strategy
Board members of a charity or NFP are responsible for establishing the organisation’s long-term financial direction. This strategic oversight ensures that all financial activities align with the organisation’s charitable purposes and goals.
A key part of this responsibility involves several core actions:
- Approving strategic plans: The board must review and approve the overall strategy that guides the NFP.
- Setting budgets: Board members are tasked with approving annual budgets that allocate resources effectively to achieve strategic objectives.
- Defining financial goals: The board sets clear financial targets and goals to ensure the organisation remains sustainable and capable of fulfilling its mission.
Monitoring Financial Performance & Managing Risk
A fundamental duty for board members is the continuous monitoring of the organisation’s financial health and performance. This involves confirming that financial reports are accurate, timely, and directly aligned with the NFP’s strategic objectives.
Furthermore, the board is tasked with overseeing financial risk management to protect the organisation’s assets. This includes implementing and supervising a system of financial controls designed to:
- Prevent fraud
- Minimise errors
- Reduce the risk of insolvency
Prudent management of financial affairs is a core requirement under the ACNC Governance Standards.
Upholding Duties Under Australian Charities and NFPs Commission Governance Standards
To ensure compliance, charities must take reasonable steps to see that their board members, or ‘Responsible People’, adhere to the duties outlined in ACNC Governance Standard 5. These duties are central to good governance and responsible financial management.
The specific duties that board members must uphold include:
| Duty | Description |
|---|---|
| Act with reasonable care and diligence | Board members must act with the level of care and diligence that a reasonable person would in their position. |
| Act honestly and fairly | All actions must be in the best interests of the charity and for its stated charitable purposes. |
| Disclose conflicts of interest | Any actual or perceived conflicts of interest must be disclosed to the board. |
| Not misuse position or information | Board members must not use their role or the information they gain for personal advantage. |
| Ensure responsible financial management | The financial affairs of the charity must be managed in a responsible and prudent manner. |
| Not operate while insolvent | The board must not allow the charity to continue operating if it is unable to pay its debts as they fall due. |
Request a Free Consultation with one of our experienced Lawyers today.
Get Your Free Initial Consultation
Establishing a Sound Financial Governance Framework
Implementing Clear Financial Systems & Controls
Effective financial oversight in a charity or NFP relies on robust systems that go beyond simple spreadsheets. Modern accounting software provides an efficient and transparent way to manage finances, but it must be supported by a skilled individual, whether they are an in-house or outsourced professional.
To safeguard your organisation’s assets, it is essential to implement clear financial controls. These controls are processes and procedures designed to prevent and detect errors or fraud. They can be categorised into two main types:
| Control Type | Description | Example |
|---|---|---|
| Preventive Controls | Proactive measures designed to reduce the opportunity for financial issues to occur. | Segregation of duties, such as requiring dual signatories for bank transactions or a second person to approve invoices. |
| Detective Controls | Measures used to identify discrepancies after they have already happened. | Regular reconciliation of financial records against bank statements to spot inconsistencies and ensure accuracy. |
Developing Essential Financial Policies for Your NFP
A strong governance framework, often established with guidance from commercial and business lawyers, is built on clear and well-documented policies that guide decision-making and ensure consistency. For board members of charities and NFPs, developing and enforcing these policies is a core component of meeting ACNC Governance Standards.
Key policies include:
| Policy | Purpose |
|---|---|
| Delegated Authority Policy | Defines who has the authority to approve purchases and payments, and at what financial levels, ensuring appropriate scrutiny of expenditures. |
| Conflicts of Interest Policy | Establishes clear procedures for disclosing and managing any actual or perceived conflicts of interest among board members, which helps prevent internal disputes that could lead to commercial litigation. |
| Related-Party Transactions Policy | Ensures that any dealings between the charity and its related parties are conducted at arm’s length and are properly assessed and documented. |
Request a Free Consultation with one of our experienced Lawyers today.
Get Your Free Initial Consultation
Key Financial Reporting Practices for Charities and NFPs Commission & ATO Compliance
What Your Board Should Expect from Financial Reports
As a board member, you should receive clear and concise financial reports to help you fulfil your oversight duties. These documents are fundamental tools for setting the organisation’s financial direction and ensuring it aligns with strategic plans.
Effective financial reporting for your charity or NFP builds trust and supports informed decision-making. Your board should expect to regularly review a set of key financial documents, including:
| Report / Document | Description & Purpose |
|---|---|
| Annual Budget | Sets the financial roadmap for the year, aligning spending with the organisation’s strategic goals. |
| Regular Financial Reports | Provide timely comparisons of actual performance against the budget, often using charts and analysis for clarity. |
| Core Financial Statements | Includes a profit and loss statement (revenue/expenses), a balance sheet (financial health), and a cash flow statement (cash movement). |
| Independent Audit | If required, an external audit report provides additional confidence in financial management and should be carefully reviewed. |
Avoiding Common Financial Reporting Compliance Gaps
The ACNC frequently identifies compliance issues in its reviews of Annual Information Statements (AISs) and Annual Financial Reports (AFRs).
Board members must be vigilant to ensure their organisation’s financial reporting is accurate and complete to maintain ACNC compliance. Common reporting errors that charities and NFPs should avoid include:
| Common Reporting Error | Description |
|---|---|
| Missing elements in reports | The omission of required documents such as cash flow statements or essential notes to the financial statements. |
| Discrepancies between documents | Figures reported in the audited financial statements do not match those submitted in the Annual Information Statement (AIS). |
| Incorrect framework identification | Financial statements are incorrectly identified as “general purpose” when they should be classified as “special purpose.” |
To prevent these gaps, boards should confirm that key management personnel disclosures are included in both the accounts and the AIS. Additionally, it is a crucial step to have the organisation’s auditor review the AIS before submission.
Proactive Financial Risk Management & Scrutiny
Managing Funds & Investments to Align with Your NFP’s Purpose
While a charity or NFP can accumulate funds, this practice must be reasonable and directly linked to a defined goal or strategic justification. Amassing excessive reserves without a clear plan can be viewed by the ATO and ACNC as a failure to apply funds towards the organisation’s purpose, potentially breaching ACNC Governance Standards and tax laws.
Board members must ensure that all financial strategies, including investments and endowments, are managed with a coherent plan and policy framework. This proactive oversight is crucial for demonstrating that financial activities are designed to achieve the NFP’s charitable objectives.
Key considerations for proper financial management include:
| Consideration | Description |
|---|---|
| Strategic Justification | Any accumulation of funds must be supported by a clear strategy showing how reserves will be used to further the organisation’s mission. |
| Endowment Alignment | An endowment must be managed strictly in accordance with policies that direct it towards achieving the entity’s core purposes. |
| Purpose-Driven Activity | All fundraising, accumulation, and investment activities must align with the stated charitable purpose, not become a purpose in themselves. |
Scrutinising Related-Party Transactions & Overseas Dealings
Both the ATO and ACNC are paying closer attention to transactions between related parties and dealings that cross international borders, which are governed by the ACNC External Conduct Standards. Board members must ensure that all such arrangements are conducted with rigorous, arm’s-length assessment processes to maintain transparency and compliance.
A formal Related-Party Transactions Policy is essential for managing the risk of funds being shifted between entities without proper oversight, and it is crucial to understand the rules for reporting related party transactions correctly. This policy helps establish clear guidelines and procedures for handling transactions that might otherwise raise regulatory concerns.
Regulators are on the lookout for several potential signs of non-compliance, including:
| Potential Sign of Non-Compliance | Description / Example |
|---|---|
| Lack of public benefit | Contractual arrangements, such as intra-group loans or service agreements, that do not clearly demonstrate a public benefit. |
| Unassessed grants or loans | Grants or below-market loans provided to related entities or individuals without a thorough and independent assessment process. |
| Inappropriate remuneration | Payments made to key management personnel and other staff that are not appropriate or properly benchmarked. |
| Insufficient due diligence | A lack of adequate vetting or reporting on the use of funds in overseas dealings. |
| Failure to meet External Conduct Standards | Non-compliance with the ACNC’s standards when sending funds or operating outside Australia. |
100% Obligation-Free
Speak to one of our Experienced Lawyers Today
Conclusion
Effective financial oversight is a critical responsibility for board members of charities and NFPs, requiring a robust governance framework to meet ACNC Governance Standards. Adhering to proper financial reporting practices and proactively managing risks are essential for maintaining compliance with the ACNC and ATO, thereby securing public trust.
To ensure your organisation’s financial governance aligns with these complex standards, seek trusted legal guidance from the experts at LawBridge. Contact our specialised not-for-profit and charity law firm today to secure your compliance and protect your mission.
