Advocacy: Charity Case

The five-year review of the national charity regulator throws up some important issues for directors. Louise Petschler MAICD outlines the AICD response.

December 2017 marked five years of operation for the Australian Charities and Not-for-profits Commission (ACNC), the national charity regulator. The establishment of the ACNC followed years of lobbying from the charity sector, several government inquiries and a heated debate about the practicalities of its introduction.

The ACNC’s enabling legislation mandated a five-year review, which closed at the end of February. Public consultation for this review was broad, considering the overall effectiveness of the regulatory framework and the success of the ACNC in implementing it to date. The AICD consulted our policy committees, NFP Chairs’ Forum and division councils to inform our response to this review.

Ensuring the objects of the ACNC Act remain contemporary

The AICD is of the view that the current objects, as set out in the ACNC legislation, remain appropriate and do not require expansion. We have argued, however, that the legislation should make clear that the primary object of the ACNC should be protecting and enhancing public trust and confidence in the sector. We consider that the other objects — promoting a vibrant sector and reducing red tape — support and flow from this overarching priority.

Duties for charity directors

An unusual feature of the ACNC framework is that directors’ duties under its “governance standards” do not apply to charity board members. Instead, the governance standards require “charities to take reasonable steps to make sure that […] duties apply to responsible persons and that they follow them.”

Because the establishment of the ACNC “turns off” certain provisions in the Corporations Act 2001 (Cth) — including civil directors’ duties — the directors of charities that are companies limited by guarantee, as well as unincorporated associations, do not have directors duties expressed through statute (although their common law obligations remain). Directors of charities incorporated under state laws will generally have some individual duties imposed through those statutes. It is likely that this formulation reflects the constitutional limitations on the ACNC as a Commonwealth regulator.

As a matter of principle the AICD would be supportive of directors’ duties being expressed and applied as individual duties for all charities. Recognising the constitutional constraints in play, the AICD has recommended that:

The government should promote a dialogue about referral of powers; and the ACNC should promote awareness of the governance standard as well as directors’ duties and expectations, more broadly.

Importantly, we emphasise that charity directors are often volunteering their time and expertise for the public benefit, and the regulatory settings must not be overdone (imposing the equivalent of Corporations Act civil penalties on charity directors, for example, would not be appropriate).

Improving the reporting framework

The AICD considers that the ACNC’s reporting framework provides sufficient transparency about charities’ operations and financials, and balances the regulatory burden that this creates against the benefit of charitable tax concessions charities enjoy in exchange. However, the AICD has made recommendations on how it could be improved through:

• Lifting the reporting thresholds to reduce the reporting burden on smaller charities; and
• Consultation with the sector and standard-setters on accounting and reporting requirements, looking closely at reducing the material error rate in charity reporting.
• The consultation asked for views about the drivers of distrust in charities. Among other things, the AICD raised the harm done to the reputation of the sector by instances of private benefit. As a means of addressing this risk, the AICD has recommended further reporting be required of all charities about related party transactions.

In our view, even small charities with less than $250,000 in annual turnover, which do not provide financial reports, should be required to disclose any related party transactions through their Annual Information Statement. Although this would increase the reporting burden for some charities, the feedback received through our consultation with members strongly affirmed that this would be offset by the benefit of greater transparency and improved governance on this important issue.

Secrecy provisions

The ACNC’s legislation prevents it from disclosing the context or rationale for its enforcement decisions. In our view, the regulator should be able to explain what misconduct it has detected and what has been done to address it. This is important to protect public trust in the sector and support sector review and improvement.

In some contexts, regulators are able to disclose they are undertaking an investigation prior to a final determination being made. The AICD does not consider this appropriate for the ACNC, given the importance of reputation to charities. However, we accept there may be exceptional circumstances where it is in the public interest to know that an investigation into a charity is underway. We have suggested it may be beneficial for the ACNC to have the power to make such a disclosure where it is in the public interest, but only if subject to strong checks and balances, such as approval by the court.

Blueprint for growth

In addition to our responses to the specific questions raised in the review, the AICD has set out its recommendations on engagement and regulation of the NFP sector and charities in our April 2017 report Governance of the Nation: A Blueprint for Growth.

The AICD recommended:

• A fit-for-purpose regulatory environment with nationally consistent definitions and reporting systems, and less duplication; and
• Freedom of voice for funded NFPs and their boards.

The AICD will be watching the development of the ACNC’s regulatory framework closely to ensure that it continues to provide an appropriate and fit-for-purpose regulatory regime, which reduces red tape for charities and enables them to achieve good governance.