Practical Governance for NFPs

There’s no denying not-for-profits operate in pursuit of a higher cause – whether it’s working to eradicate poverty, keeping the local sporting club operating or providing much-needed support to our most vulnerable members of our community. But sometimes, NFPs can become entangled in financial, or even legal difficulty because they’ve relied solely on the altruistic motivations of their cause rather than ensuring on good governance.

Putting in place the necessary frameworks to deal with the myriad of statutory requirements that impact the NFP sector shouldn’t be prioritised any less than a powerful marketing campaign that tugs at the heartstrings. That’s because having these measures entrenched can be just as useful to engage donors. An NFP that can demonstrate it has sound governance, one that is capable of managing risk and confident in its financial management, is always a more attractive proposition for large endowments and grants, than one which is struggling to keep its books in order.

To ensure good governance, an NFP must consider the following:
 

1.    Financial reporting

Whether the NFP is an incorporated association or a company by guarantee, there’s infinite reporting obligations, sometimes far more than what’s expected from a private corporation. The diversity of the sector also means there’s never a one-size-fits-all solution when it comes to financial reporting.

However, there is often a common challenge within the sector, and that’s around financial statements. Many times, an NFP opts to prepare Special Purpose Financial Statements which allows the board or relevant sub-committee to determine their own accounting standards and to present a simple profit and loss and balance sheet. Often, what should have been prepared are General Purpose Financial Statements which meets the rigour of Australian Accounting Standards (AASB).

An NFP can only prepare Special Purpose Financial Statements when the users of the financial statements have access to other financial information regarding resource allocation. The users of an NFP’s financial information can be varied and diverse, and includes existing and potential resource providers such as investors, lenders, other creditors and donors. Users also extend to recipients of goods and services such as beneficiaries, for example, members of the community and parties performing a review or oversight function on behalf of other users, including regulators and members of parliament. The Australian Accounting Standards Board (AASB) has also identified ‘taxpayers’ as one of the potential users of an NFP’s financial information. And this is why preparing Special Purpose Financial Statements becomes problematic because there are usually other users that the NFP hasn’t even considered.

Financial statements also have to be reviewed or audited when an NFP reaches a set turnover, dependent on which jurisdiction the organisation falls within. A review or audit is generally required once turnover reaches $250,000 per annum, and an audit is generally mandated once the NFP turnover more than $1 million.
 

2.    The Board

The role of the board is vital, and as most NFPs are funded through the community or government, there’s a higher layer of probity. The board itself should have a clear charter which defines the required skills, roles and responsibilities.

Many NFP boards are too reflective of the community it serves rather than appointing other members who are qualified, but not personally impacted by its mission. Just like boards in the private sector, it is essential members have a cross-section of skills and experience, and this includes a level of financial and legal literacy. If the organisation is government-funded it may need a Board member adept in political liaison, or if it relies heavily on donations, then perhaps a proficient fundraiser, it may also benefit from someone with industrial relations or human resources experience.

A high-performing board will also ensure they’ve clearly set out delegated authority which could extend to the non-financial areas of the organisation as well as the financial. For example, a delegated authority would define the amount employees (such as the CEO) could spend without approval and when they could spend it. A non-financial delegated authority could cover an item such as the organisation’s communications plan – who can talk to the media and, what’s the consequences if an employee gives a statement from an un-informed position?
 

3.    Risk Management

A board member can ultimately be held personally liable for the actions of the NFP. Too often, the board will turn their attention to operational matters and overlook the fundamental risks that will sink an organisation. It is critical all boards focus on risk.

A robust risk framework will work through the big-ticket items, where the organisation is exposed and what controls are in place to provide protection. Those controls must allow the board a level of comfort while also aligning with its risk appetite.

Where Outsourcing Can Help

Anyone contributing to an NFP wants to be satisfied the money will be spent in the right way and that the organisation is financially viable and capable of managing those funds. An outsourced CFO service – such as what’s offered at Moore Stephens – is a way of providing peace of mind to the board that the financial reporting obligations are being managed effectively.

Outsourcing the CFO function gives NFP entities access to highly-skilled CFO abilities, including reporting and governance experience, without the expense of an in-house salary which can range from $150,000 to $300,000. A financial controller and bookkeeper can also similarly be outsourced, as per the CFO function, with the CFO overseeing the function to meet reporting and compliance obligations. This also allows an NFP to access support 52 weeks a year, and avoids the issue of an unexpected absence of in-house finance employees.

An outsourced CFO also works with the board and executive management to pull together the information that allows them to understand the critical areas of the finance function, while also helping them to move beyond the operation level to drive the organisation strategically.