ACNC review: NFPs outside the charity space can learn from these mistakes

This article was current at the time of publication.

Findings by the Australian Charities and Not-for-profits Commission (ACNC) from its reviews of the financial reporting of charities provide useful insights for charities and other not-for-profit (NFP) organisations.

Ram Subramanian, Senior Manager – Reporting Policy at CPA Australia, believes the reviews open a  window into the reporting by some of Australia’s estimated 700,000 not-for-profits, many of which don’t have their reporting scrutinised in the same way as charities registered with the ACNC.

Framework choice is key

Mel Yates, ACNC Director of Reporting and Red Tape Reduction, says the ACNC reviews provide insights for organisations outside the charity space.

“Preparers of financial statements and assurance providers need to understand the basis of preparation for financial statements,” Yates says.

“That means knowing what framework the financial statement is being prepared under. In our most recent reviews, we see that only 70 per cent of audit and review reports state whether the financial report complied with the ACNC Act.

“For any entity – whether for-profit or not-for-profit – it’s very important that the basis of preparation is clear in the financial statements and is also replicated in the opinion in the audit or review.”

Findings reveal 30 per cent failure in presenting a full set of financial statements

The regulator’s latest annual review of reporting by medium and large-sized charities found that when lodged, around 30 per cent of annual financial reports were missing one or more necessary key components.

“Arguably, it’s not the auditor’s or reviewer’s responsibility to lodge the statement with the ACNC,” Subramanian observes. 

“It might be the charity itself lodging it. But if auditors or reviewers sign off on financial statements, they would have signed off on a full set.”

The annual review also reveals 13 per cent of charities that prepared general purpose financial statements did not clearly provide disclosure of the appropriate accounting estimates and judgements their management made when applying the charity’s accounting policies. 

Of the special purpose financial statements the ACNC reviewed, 62 per cent lacked disclosure about the charity being a not-for-profit and 41 per cent did not disclose fees paid for the audit or review of financial statements.

While the majority ensured the information in both their annual information segment (AIS) and annual financial report (AFR) matched, the ACNC found that nearly 5 per cent had differences.

“You are supposed to lift some information from the AFR and put it into the AIS when lodging it,” Subramanian explains. 

“It should – broadly speaking – be the same as what is in the AFR, but the ACNC finds that there are transposition errors and some charities are putting in the wrong information.”

Related Party Disclosures

Yates adds that some of the most common errors concerning a charity’s financial statement relate to AASB 124 Related Party Disclosures. 

He says that under the ACNC reporting framework, not all charities need to comply with the standard. However, where a charity does have to comply, errors occur with disclosure of key management personnel compensation and issues with other Related Party Disclosures are also common. 

Either they are not disclosed correctly, or not reflected at all in the financial reporting when they should be.

“What for-profits can learn from [the] findings of our reviews is to ensure there is a complete set of financial statements prepared and lodged,” Yates adds. 

“In the charity space, we often [do not] see a complete set.”

Correct presentation of expenses

Accounting standards require charities to present expenses recognised in their profit and loss statements using a classification based on their nature or function. 

Despite this, the ACNC found 16 per cent of sampled charities incorrectly reported this using a mixture of both.

Role of reporters and auditors

“It’s all to do with good governance and being transparent and accountable,” Subramanian says, emphasising that those who have oversight of a charity are responsible for preparing its financial reports.

“But it’s equally the auditor’s or reviewer’s responsibility to make sure the financials are put together correctly. Whether practitioners are helping the charity to compile its financials or are auditing or reviewing them, they have a responsibility to ensure these errors don’t occur. 

“I think it’s an ongoing process of improvement.”

When it comes to practitioners, Yates stresses the importance of independent assurance. 

“An audit or review helps to build trust and confidence in financial reporting because it gives validation that the financial statements are true and fair, that there are no material misstatements and that there has not been any evidence of fraud,” he says.

A new framework for smaller NFPs

Subramanian notes that the Australian Accounting Standards Board is currently developing a new framework for reporting by smaller NFPs.

“Many argue that the framework we [currently] have is too sophisticated,” he says. “It might be suitable for larger NFPs, but not smaller NFPs.”  

It is possible that a more fit for purpose NFP reporting framework could alleviate some of the challenges currently faced by charities and NFPs when preparing and lodging their financial reports.