In the second of a three-part series, Mark Hucklesby looks at Government moves to reduce the cost and complexity of preparing and filing financial statements
Ever wondered where that $20 went that you donated to a not-for-profit organisation? How much went into overheads and how much actually made it to the "coal face"?
The Government indicated its intentions to seek more financial accountability from not-for-profit organisations in an 81-page discussion paper issued by the Ministry of Economic Development (MED) in September 2009.
But what level of reporting is appropriate? The more than 100,000 not-for-profit organisations in the country have until January 29 to have a say on what their reporting responsibilities should be and what they should report on.
The MED is particularly interested in whether organisations that spend more than $20,000 per annum should file their financial statements with a regulator.
They are also asking whether all organisations with an annual expenditure greater than $100,000 per annum should be subject to an annual review, and when their expenditure exceeds $1 million should they automatically be subject to an audit?
Also noteworthy is that the closing date for submissions to the MED coincides with another closing date set by the Accounting Standards Review Board (ASRB).
The ASRB has an important role to play because it is the independent crown entity that presently gives financial reporting standards the force of law.
The MED is proposing that if a not-for-profit organisation issues a set of financial statements that do not comply with the applicable financial reporting standards approved for not-for-profit organisations by the ASRB, then all members of the not-for-profit's governing body might end up being individually prosecuted for failing to comply with the Financial Reporting Act 1993.
And the consequence of failing to comply with the act if financial reporting breaches are not corrected will either be significant fines, imprisonment or, in extreme cases, both.
Although not-for-profits are quite different from companies (ie they are service oriented rather than profit driven), according to the MED the principles that determine "who should report" should be the same, no matter what sector the reporting entity operates in.
The MED proposals require answers to three important questions. First, is the entity publicly accountable? Second, are all the people who have an interest in the entity directly involved in managing and governing it? And finally, is the entity economically significant?
The answers provided then drive how much reporting and disclosure is required to be made by the not-for-profit entity, and whether or not it should be subject to an audit or a review.
In almost every case, not-for-profits will have public accountability (because they receive funds from the public) and there are very few not-for-profit organisations where all of its members are directly involved in the day-to-day running and governance of the organisation.
Given this, size will then determine if the not-for-profit needs to report and, if so, how much it needs to disclose.
It will also determine, as a minimum, whether or not a review or an audit is required.
It is clear, from reports issued following recent high-profile fund-raising events, that many donors are wanting to know through annual financial statements how much of their donated dollar is reaching the intended recipient (such as telethons and pub charities).
So if you think these proposals place an unfair burden on not-for-profits, now is the time to put pen to paper and share your point of view with officials at the MED and the ASRB. This is a rare opportunity to comment - make the most of it.
In the next article we will consider how the MED and ASRB proposals affect public sector entities.
* Mark Hucklesby is national technical director for Grant Thornton New Zealand.
