Transparency in the Not for Profit Sector

Professor Peter Shergold from the Centre for Social Impact unpacks the significance of transparency for the Not for Profit sector. This article is from the CSI blog. 

OPINION: Last night was held the fifth annual PwC Transparency Awards, sponsored in collaboration with the Institute of Chartered Accountants in Australia (the Institute) and the Centre for Social Impact (CSI). Since the awards began in 2007 more than 200 charities have opened their Annual Reports to forensic scrutiny. It takes both effort and courage to enter.

What, other than exuberant competitive spirit, explains the increased interest of not-for-profit (NFP) organisations in the quality and openness of their reports? I think the momentum for transparency reflects four related causes, each of which is evolving in a manner that accentuates their combined significance.

First, compliance requirements are driving change. The establishment in October 2012 of a new national regulator, the Australian Charities and Not-for-Profits Commission, will place significantly increased pressure on larger community organisations to report their operations. The independent statutory body will establish reporting requirements for every charity on a publicly searchable register. Each will need to set out its financial statements in a clear and unambiguous manner. Changes in access to the beneficial tax regime enjoyed by charities will require those social enterprises that use trade to sustain their mission to report on their commercial activities in such a way that surplus can be distinguished from profit. Fundraising will come under greater scrutiny.

The political rhetoric of change is couched in terms of streamlining, emphasising the creation of- a ‘one-stop-shop’ with ‘report once, use often’ requirements. If the COAG reform process is successful, it is true that NFPs will benefit from a national (or harmonised) legislative regime. In the short-term, however, the regulatory burden may actually increase. Already the Commission is actively recruiting compliance and intelligence teams. Assurances are being given that investigations will be ‘proportionate’ and, where possible, addressed through ‘self-correction’. Nevertheless, as Lee White, CEO of the Institute has recognised, this new era will require the organisation to strengthen its role both as an advisor and as an advocate.

Second, there is increasing pressure for public accountability. Many of the organisations that will come under the ambit of the new Commission will be contracted deliverers of budget-funded Commonwealth and State government services. Service agreements with outsourced NFP providers are now valued at more than $26 billion annually.

Parliaments and government auditors require NFPs to account for expenditure against contractual conditions and administrative guidelines. It is envisaged that in the near future all jurisdictions will expect to see financial reporting set out within a standard chart of accounts. Hopefully this will be accompanied by a reduction in the presently excessive levels of bureaucratic red-tape. Governments should expect transparent reporting against performance rather than process-driven compliance.

Third, there is a need to maintain the trust of the diverse stakeholders to whom a NFP has to report. In the words of PwC Corporate Responsibility Partner, Mark Reading, transparency plays “a vital role in increasing public confidence” in the sector. Supporters – volunteers, donors, benefactors, philanthropic foundations, corporate partners and social investors – need to be assured that scare resources are being used with integrity and effectiveness in pursuit of mission.

Reputation is even more important to a NFP than it is to a publicly-listed company. Transparency is the cornerstone of trust. David Crosby, CEO of the Community Council for Australia, who headed this year’s Awards Jury, put it clearly: those who provide time and money to NFPs need to be provided with “honest and balanced reporting and a clear business strategy”.

Fourth, NFPs are increasingly recognising the need, for themselves as much as their stakeholders, to audit clearly the full value of the social, environmental or cultural returns on their mission-driven activities. According to Andrew Young, CEO of CSI, “transparent reporting needs to be underpinned by a commitment to measurement, so that funders gain a clear sense of the cost and value of the impacts being created”.

So how do this year’s winners (the Cancer Council of New South Wales, Lifeline Australia, Opportunity International and the Bridge Housing Limited) meet these expectations? Take a look for yourself and I hope you’ll agree, pretty darned well.

Complex programs have been simplified so that the sense of narrative remains clear. The creation of social impact has been well set out. There is a refreshing honesty in reports that identify not only achievements but also the disappointments of the past and challenges for the future. There is a careful balance between business strategy and mission.

The Annual Report awards for NFPs are a cause of celebration. They recognise outstanding achievement. They are not, of course, the end of the story. One of the distinctive characteristics of the Transparency Awards is that most of those organisations that enter continue to submit their reports in successive years. It’s a genuine learning experience. Organisations are well aware that the benchmark for transparency is being lifted each year; that standards continue to rise and that criteria are evolving.

Hopefully this year’s contestants, together with many other NFPs, will be submitting their reports for independent assessment again in 2013. In the meantime do take a few minutes to examine those organisations who have led the field this year.

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