Charity Financial Reporting Faces Regulatory Shake Up

By all accounts some charities are still producing sub-standard financial reports but the regulations on reporting are about to change, writes Jeff Tulk, from specialist Not for Profit accounting firm Saward Dawson.

The recently released ACNC report, Lessons on reporting to the Australian Charities and Not-for-profits Commission, concluded that “it would appear that there is a lack of awareness of the financial reporting requirements of the ACNC by charities” as the sample of selected financial reports contained many errors/omissions.

Many of the errors or omissions identified represented clear non-compliance with the requirements, including omitted statements of cash flows, inadequate or a non-existent basis of preparation and accounting policy notes.

This is not at all surprising. The results are similar to the findings in the AASB Research Report No1 released in June 2014 – Application of the Reporting Entity Concept and Lodgement of Special Purpose Financial Statements. This report examined financial reports lodged with state based regulators (typically incorporated associations) and identified that “the majority of entities lodged financial statements that typically did not follow Australian Accounting Standards and were prepared in an inconsistent format”.

In particular:

• A large proportion of entities examined across the three states provided no explicit indication as to whether the financial statements were general purpose financial statements or special purpose financial statements

• There was substantial variation in the information disclosed across the different types of financial statements and in some instances the quality of disclosure appeared to be extremely poor

• With the exception of larger associations and co-operatives, entities varied as to whether they lodged balance sheets and/or income statements, and entities rarely lodged statements of cash flows

Some blame for the poor reporting by charities must rest the current audit providers.  Many charities understandably focus on pursuing their charitable purpose and rely on external advisors in relation to matters like financial reporting.

Unfortunately the ACNC report would indicate that these advisors have not ensured their clients met some basic ACNC requirements.

Charities that have previously reported to state based regulators including incorporated associations (41 per cent of charities) have been able to lodge reports that comply with state provisions under the ACNC transitional rules.  However, these rules expire after the 2015 reporting periods.

Accordingly for the financial year ending from 1 January 2016, these charities’ financial reports will need to comply with the minimum six accounting standards as contained within the ACNC regulations.  In addition for all charities classified as large (with a turnover greater than $1 million) and any medium charities that are audited, their  financial reports will be required to be audited by a registered company auditor.

Currently no state or territory requires incorporated associations to be audited by a registered company auditor.  Typically a qualified accountant rather than an audit specialist is able to complete the audit.

This is likely to result in numerous charities being required to appoint new auditors in the next 12 months.

Every charity, in particular incorporated associations and unincorporated entities, should check if their current auditor is a registered company auditor.

I would expect to see significant improvements in the financial reporting of charities after 2015 assuming charities appoint a registered company auditor who has sector specific knowledge and has kept up to date with the requirements of the ACNC.

About the author: Jeff Tulk is the Head of Financial Reporting at specialist Not for Profit accounting firm Saward Dawson.