ACNC Myth-Busts Charity Admin Costs

The charity regulator, the Australian Charities and Not-for-profits Commission (ACNC), wants a dedicated accounting standard that applies to the Not for Profit sector with clear guidelines that set out how charities report different income and expenses.

The call coincides with the publication of a new ACNC guide to help the public and donors understand charity administration costs.

ACNC commissioner Susan Pascoe AM said administration cost ratios as a measure of charity effectiveness were particularly flawed due to the inconsistency in accounting practices used by Not for Profit organisations.

“Other Commonwealth jurisdictions already have accounting standards specifically for Not for Profit organisations, and we will continue to advocate for their introduction here in Australia,” Pascoe said.

The new ACNC guide is a set of frequently asked questions around charities and administration costs, which highlight the common issues raised by the public and sets out the regulator’s view.

“There are no laws or regulations that specifically set out the amount charities can spend on the expenses that would be considered administration. There are also no clear definitions as to what should be considered administration costs for accounting purposes,” Pascoe said.

The Australian Accounting Standards Board (AASB) said it was currently in discussion with the ACNC and others on proposed changes to the way Not for Profits recognise income in financial reporting.

AASB chair Kris Peach told Pro Bono Australia News there was a standard on revenue for Not for Profits that will be released at the end of 2016 which address many of the current concerns about accounting for revenue.

“We are [also] in negotiations at the moment about how the International Financial Recording Standards are being adopted here and we are also doing some benchmarking to understand exactly where we are internationally… and what is the best thing for the sector,” Peach said.

Peach said the bigger issue is about who should be required to lodge financial statements in the Not for Profit sector and what the right criteria in thresholds for that should be.

“There is clearly a feeling that those thresholds are too low. And so we are certainly hearing that there is interest in a third tier of reporting. That would be simpler for the Not for Profits and that is certainly something that the AASB will be considering in the near future,” she said.

“It is also important that we are not just looking at financial information so we are also looking at the non-financial piece which is, as Susan Pascoe points out, how effective is the charity. That was the other exposure draft we put out last year which is the service performance reporting.

“There are a whole lot of things that need to be considered in this area and certainly we are aware of that and we are actually in the process of trying to do the consultation to see exactly what we should be looking at.”

Susan Pascoe said that each month the regulator received around 60 to 70 concerns about charities, one-third of which originate from the public.

“Many of the concerns raised by the public relate to the expenses of the charity, which are commonly referred to as administration costs,” Pascoe said.

“This certainly makes it difficult for the public to understand if the charity is being run efficiently and effectively, which is of course a major concern.”

She said the new ACNC guide would help the public and donors understand what administration costs are, why they are an important part of running a charity, and why administration cost ratios can be an unreliable way to compare charities and to correct common misconceptions.

“We have published this guidance to help the public and donors understand what administration costs are, why they are necessary, and when they may be unreasonable and therefore warrant scrutiny from the ACNC,” she said.

“In my experience, the biggest myth out there in the community is that a charity that can say ‘100 per cent of your donor dollar goes to the charitable cause’ is the best charity to donate to.

“All charities need to be using their resources to further their charitable purposes, and carefully managing finances is an important part of that.

“However, simply having low administration costs alone does not necessarily indicate an effective, well-run charity. Similarly, having higher administration costs does not necessarily indicate that a charity is ineffective and poorly run.

“Administration cost ratios alone are not the best way to compare charities.

“The most important consideration is the effectiveness of the charity. Are they doing important work for the community and are they making a positive impact? Those are the questions donors should be asking themselves.”