A Guide to Australian Charities and Not-for-profits –  Commission Guidelines and Best Practices for Charity Investment Decisions

Introduction

Adhering to the guidelines and best practice principles set by the Australian Charities and Not-for-profits Commission (ACNC) is crucial for any charity when making investment decisions, as these decisions are fundamental to responsible financial management and overall governance. Effective investment strategies, guided by ACNC governance standards, ensure that a charity’s resources are prudently managed to further its charitable purposes and maintain public trust.

For Responsible People, understanding and implementing these best practices in investment decisions is essential for upholding their duties and ensuring good governance within their charity. This guide offers practical insights into ACNC expectations, helping charities navigate the complexities of investment policies, risk management, and compliance to achieve governance for good and effectively steward their funds.

Developing and Implementing Investment Policies for Charities

Importance of Governance Procedures for Investment Decisions

Effective governance procedures are fundamental for a charity when making investment decisions. These procedures ensure that all investment choices are carefully examined and align with the charity’s mission and risk appetite. Implementing robust governance structures provides a strong foundation for accountability and transparency in the decision-making process.

Strong governance for investment decisions involves several key aspects:

• Scrutiny of Decisions: Charities must have processes to thoroughly evaluate potential investments. This includes assessing how an investment furthers the charitable purposes and whether it exposes charitable funds to an appropriate level of risk.
• Transparency: The decision-making process should be open and clear. This helps build trust with stakeholders and demonstrates that the charity is managing its resources responsibly.
• Record-Keeping: It is crucial to clearly document the rationale behind investment decisions. These records should articulate why a particular investment was chosen and how it aligns with the charity’s objectives and ACNC governance standards.

Documentation is vital for demonstrating compliance and accountability. Responsible People play a critical role in this framework by ensuring their own accountability and implementing structures that guarantee accountability throughout the charity.

This includes:

• Identifying major strategic risks associated with investments
• Ensuring systems are in place to manage these risks effectively

Adherence to ACNC Governance Standards, particularly those relating to the duties of Responsible People, will assist a charity in making investment decisions within an appropriate governance framework.

Best Practices for Managing Charity Investments and Financial Controls

Establishing Strong Financial Controls and Delegations

Implementing robust financial systems and controls is a cornerstone of good governance for any charity, helping to protect its assets and ensure operational effectiveness. It is a best practice to maintain a formal document detailing all financial controls the charity employs. These controls are vital for managing funds responsibly, including those related to investments, and for mitigating risks such as fraud and errors.

Key financial controls that a charity should establish include:

• Requiring multiple authorisations: For any financial transaction, whether it involves money leaving or entering the charity, it is advisable to have more than one person involved in authorising and completing it. This dual oversight enhances supervision of the charity’s financial dealings. Similarly, access to online banking and statements should not be restricted to a single individual.
• Implementing clear financial delegations: Charities should establish clear policies regarding who is authorised to approve purchases and other transactions, and up to what value. For instance, the board might set a spending limit for the CEO, beyond which board approval is necessary. Such delegations help reduce the risk of unauthorised expenditure and potential fraud.
• Securing account information: Protecting access to the charity’s financial accounts is crucial. This involves:
  • Keeping online banking passwords confidential
  • Regularly updating passwords, especially when an authorised person leaves the organisation
  • Knowing exactly who has access to bank accounts, petty cash, or safes
• Regularly reviewing controls: Financial controls should not be static. It is good governance to periodically review and strengthen these controls, perhaps by making it a regular agenda item for board meetings.

These measures contribute significantly to the responsible management of a charity’s finances, which is a key duty of Responsible People under ACNC Governance Standards.

Monitoring Financial Performance and Budgeting

Effective financial management within a charity involves diligent monitoring of its financial performance, primarily through careful budgeting and regular reporting. This ensures that investment decisions and other financial activities align with the charity’s overall financial health and its charitable purposes.

Responsible People have a duty to ensure the charity’s financial affairs are managed responsibly. Essential practices for monitoring financial performance include:

• Developing and tracking budgets: A budget serves as a financial roadmap, predicting income and expenditure over a specific period. Charities should establish an annual budget and consistently track actual performance against it throughout the year. Any significant deviations from the budget warrant further investigation and explanation.
• Regular financial reporting to the board: The charity’s board or governing body holds ultimate responsibility for the organisation’s financial well-being. Therefore, they should receive and meticulously review comprehensive financial reports at regular intervals. These reports might include:
  • Current financial accounts
  • Comparisons of actual figures against the budget
  • Explanations for variances
  • Details on cash flow and bank balances
• Ensuring clarity in financial information: Financial reports and information must be presented in a manner that is easily understandable to all Responsible People, not just those with financial expertise. This transparency fosters meaningful examination of the charity’s financials and encourages a culture where questions about finances are welcomed.

Consistent monitoring and clear reporting enable the charity’s leadership to make informed decisions, identify potential issues early, and ensure that all financial activities, including investments, support the organisation’s mission and long-term viability.

Using Finance Sub-Committees for Oversight

To enhance financial oversight and governance, a charity may find it beneficial to establish a dedicated finance committee or sub-committee of its governing body. Such a committee can provide more detailed scrutiny of financial matters, including investment performance and associated risks, offering valuable advice to the main board. This is a recognised best practice that strengthens a charity’s financial management framework.

The roles and benefits of a finance sub-committee include:

• Detailed financial review: The sub-committee can dedicate more time to reviewing financial reports, controls, and investment strategies in greater depth than might be possible for the full board. This allows for a more thorough understanding of the charity’s financial position and the effectiveness of its financial controls.
• Providing expert advice: Members of the finance sub-committee, who may possess specialised financial knowledge, can offer informed advice to the board on complex financial issues, investment opportunities, and risk management.
• Enhancing accountability: Including individuals on this sub-committee who are not board members can introduce an additional layer of accountability and bring diverse perspectives to the examination of the charity’s finances. This can be particularly valuable for ensuring robust governance.

By delegating detailed financial oversight to a specialised sub-committee, Responsible People can ensure that the charity’s investments are managed prudently and that financial controls are effectively protecting the organisation’s resources, aligning with ACNC expectations for good governance.

Ensuring Investments Align with Charitable Purposes and Not-for-Profit Status

Understanding Not-for-Profit Requirements in Investment Decisions

A core principle for any charity registered with the ACNC is that it must operate on a not-for-profit basis. This means the charity’s investment decisions must be directed towards achieving its stated charitable purposes for the public benefit.

Financial management for charities involves several key principles:

• Any financial returns or profits generated from investments must be reinvested back into the organisation to support its charitable work
• These funds cannot be used for the private gain or benefit of individual members, Responsible People, or their associates

ACNC Governance Standard 1 specifically addresses a charity’s purposes and its not-for-profit nature. This standard mandates that a charity must consistently demonstrate its not-for-profit status and that its operations, including investments, are geared towards its charitable objectives.

Key requirements under this standard include:

• Proving the charity was established as a not-for-profit with a charitable purpose
• Demonstrating that it continues to work towards that purpose
• Ensuring investments support this mission

When considering investments, Responsible People must ensure that decisions align with the ACNC governance standards. This involves a careful assessment of how the investment will support the charity’s mission and objectives, forming part of good governance and responsible financial management. Adherence to these governance standards is fundamental for maintaining a charity’s registration and public trust.

Managing Risks of Private Benefit and Related Party Transactions

A significant risk for charities in managing investments is the potential for private benefit, where the charity’s resources are used to benefit individuals connected to the charity rather than its intended beneficiaries. This directly contravenes the not-for-profit principle and ACNC governance standards, ultimately undermining the public’s trust in the charity.

Related party transactions, which are dealings between the charity and individuals or organisations close to it, require careful management and transparency. Such related parties can include:

• Board members, executive officers, and their close family members, such as parents, partners, siblings, or children, who might have personal interests that could conflict with the charity’s objectives
• Other organisations that have significant influence over the charity, for instance, an entity that appoints board members or has a close operational relationship with the charity

Understanding who constitutes a related party is the first step in managing these interactions effectively and upholding good governance.

Responsible People have a duty under ACNC Governance Standard 5 to disclose any actual or potential conflicts of interest. Charities should implement clear policies and robust procedures to identify, manage, and document any related party transactions and to prevent private benefit. This proactive approach to governance is essential for maintaining transparency, accountability, and public trust in the charity’s operations and achieving governance for good.

Australian Charities and Not-for-profits Commission Reporting Obligations Related to Charity Investments

Keeping Accurate Financial and Operational Records

Registered charities are required by the ACNC to maintain both financial and operational records. This is a fundamental aspect of good governance and transparency. These records must provide an accurate account of a charity’s activities and financial dealings, demonstrating proper management of investments and finances.

Financial records are essential for showing how a charity handles its money. They must correctly record and explain:

• Transactions: How the charity receives and spends its money or other assets
• Financial Position: The amount of money and other assets the charity possesses
• Performance: How the charity has performed financially

Examples of financial records include:

• General account books
• Cash book records
• Bank statements
• Details of contracts and leases
• Records of payments relating to employees

These records must be sufficient to allow financial statements to be prepared and audited if necessary.

Operational records, on the other hand, document and explain a charity’s activities. These can include:

• Annual reports
• Meeting agendas and minutes
• Operational plans
• Reports from events
• Client records

While financial records primarily demonstrate appropriate money handling, operational records like policies and strategic plans can show how decisions are made by the Responsible People and how the charity intends to manage its funds.

All records must be kept for seven years. Additionally, charities should check their own policies and other legal obligations before destroying any records.

Annual Reporting and Financial Statements

All registered charities have an obligation to report annually to the ACNC by submitting an Annual Information Statement (AIS). The specifics of what needs to be reported, particularly concerning financial statements, depend on the charity’s size, which is determined by its annual revenue.

The ACNC categorises charities into three sizes, each with different reporting requirements:

• Small charities (annual revenue less than $250,000):
  • Must submit an AIS
  • Financial report submission is optional
  • Can use either cash or accrual accounting
• Medium charities (annual revenue of $250,000 or more, but less than $1 million):
  • Must submit an AIS and a financial report
  • Financial reports must be either reviewed or audited
  • Generally required to use accrual accounting
• Large charities (annual revenue of $1 million or more):
  • Must submit an AIS and a financial report
  • Financial reports must be audited
  • Generally required to use accrual accounting

The AIS and any required financial report are typically due within six months of the end of the charity’s reporting period. Most charities use the standard financial year from 1 July to 30 June, making their due date 31 December.

Failure to submit these reports can lead to penalties and, ultimately, the revocation of a charity’s registration. The ACNC provides resources like checklists and guides to assist charities in meeting their reporting obligations.

Certain charities, such as ‘basic religious charities’, may have different reporting obligations, and transitional arrangements may apply to others.

Notifying Australian Charities and Not-for-profits Commission of Material Changes or Errors

Charities have an ongoing duty to keep the ACNC informed of certain changes and to correct any significant errors in their submitted information. This is crucial for maintaining transparency and ensuring the ACNC Register is accurate. Responsible People must ensure their charity complies with these notification requirements as part of their governance responsibilities.

Charities must notify the ACNC of changes to key details such as:

• The charity’s legal name
• Address for service
• Responsible Persons (e.g., board members)
• Governing documents (e.g., constitution)

Furthermore, if a charity discovers a material error or omission in a financial report already submitted to the ACNC, it must notify the ACNC as soon as practicable. The notification timeframes vary by charity size:

• Small charities: within 60 days of becoming aware of the error
• Medium and large charities: within 28 days of becoming aware of the error

Charities must also inform the ACNC if they believe they have significantly breached the ACNC Act or failed to comply with an ACNC Governance Standard, potentially affecting their eligibility for registration. This notification should be made as soon as reasonably possible, and no later than 28 days after becoming aware of the non-compliance.

Managing Risks in Charity Investments Including Fraud and Insolvency

Identifying and Responding to Investment Risks

Responsible People must ensure their charity has systems to identify, manage, and respond to major strategic risks associated with investments, such as market volatility or the misuse of funds. This involves a careful assessment of how any investment aligns with the charity’s objectives and its agreed level of risk tolerance.

It is a best practice for charities to develop a financial management plan that includes risk management policies and procedures before investing funds. When considering investments, it’s important to remember that charitable funds should generally not be exposed to high levels of risk.

Seeking professional financial advice can be beneficial for a charity to:

• Assess the appropriateness of potential investments, ensuring they align with the charity’s purposes and financial situation
• Evaluate the potential risks involved, helping Responsible People make informed decisions
• Develop or refine an investment policy that outlines processes for future investment decisions, ensuring they are made prudently

Thorough scrutiny of investment decisions and clear documentation of the decision-making process are vital components of good governance and help in managing investment risks effectively.

Preventing Fraud in Investment Transactions

Safeguarding a charity’s investments against fraud requires robust controls, diligent supervision, and clear accountability within the investment processes. Responsible People have a duty to protect the charity’s resources from abuse, and this includes implementing systems to manage the risk of fraud.

Fraud can occur through various means, such as false representations, abuse of position, or failure to disclose information. To prevent fraud in investment transactions, charities should establish strong financial systems and controls.

Key measures include:

• Requiring multiple authorisations: Ensuring that more than one person is involved in authorising and completing any financial transaction, including those related to investments, provides a higher level of supervision
• Establishing clear financial delegations: Defining who is authorised to approve investment-related transactions and up to what value helps reduce the risk of unauthorised actions
• Securing account information: Keeping passwords for online investment platforms and access to financial accounts secure is crucial. Access should be regularly reviewed, especially when an authorised person leaves the organisation
• Ensuring accountability: Structures and processes should exist to ensure accountability throughout the charity, including in arrangements with third-party investment managers

Regular review and strengthening of these financial controls are essential components of good governance.

Maintaining Solvency and Financial Health

A fundamental duty of Responsible People under ACNC Governance Standard 5 is to not allow the charity to operate while it is insolvent. Insolvency occurs when a charity is unable to pay its debts as and when they fall due. Investment decisions can significantly impact a charity’s financial health and solvency, making careful monitoring essential.

To maintain solvency and financial health in the context of investments, charities should:

• Practice diligent financial management: This includes keeping accurate accounts that correctly record assets (what the charity owns) and liabilities (what the charity owes). If liabilities exceed assets, the charity may be at risk of insolvency
• Monitor cash flow: Regularly tracking the money going in and out of the charity is important. If a charity is consistently spending more than it receives, including returns from investments, it could be a warning sign of impending insolvency
• Regularly review financial performance: The board should receive and review regular financial reports that detail investment performance, overall financial position, and comparisons against the budget. This helps in identifying potential issues early

Strong financial controls and proactive monitoring of the charity’s financial position are the best safeguards against becoming insolvent due to investment activities. If there is a concern that the charity is, or is about to become, insolvent, the ACNC should be contacted immediately.

Conclusion

Effectively managing charity investments requires a thorough understanding of ACNC guidelines, encompassing robust governance standards and best practices for decision-making by Responsible People. Adherence to these principles, from developing sound investment policies and financial controls to meeting reporting obligations and managing risks, is crucial for maintaining compliance and furthering a charity’s mission.

Navigating these complex requirements can be challenging, but ensuring your charity’s investment strategies are sound is vital for its success and achieving governance for good. Our trusted expertise and specialised legal services for your not-for-profit charity’s unique needs can help you in complying with ACNC governance standards. Contact LawBridge today to secure your organisation’s financial future and impact.

Frequently Asked Questions