Strengthening Not-for-Profit Governance
The AICD’s Not-for-Profit Director Tools are designed to help board members understand their role and perform their duties
as directors in the NFP sector and provide boards with practical guidance on addressing
some of the key governance challenges facing NFPs.
The role of the audit committee
A large part of an audit committee’s role is to create a link between the board and the external and internal auditors.
There is no legal requirement to establish an audit committee for not-for-profit organisations and if an organisation is small it may not be necessary to have one.
Financial literacy for NFP directors
A key role for a director is to ensure the financial viability of the NFP organisation so that it can achieve its outcomes.
Many NFPs may have a treasurer but this does not change the responsibility all directors have to make sure that the organisation makes effective use of its (often limited) resources and also make sure that it continues to remain solvent.
What directors should consider when preparing financial statements
Although all businesses must maintain financial records, not all are required by law to produce financial statements in accordance with the Australian accounting standards.
The law provides some relief from reporting requirements for small businesses, and every NFP organisation needs to be aware of what legislation is relevant to them in order to determine whether they must produce a financial report and have their financial statements reviewed or audited.
Strategic plan template
A strategic plan will clearly articulate how the organisation will achieve its purpose.
Furthermore, a good strategic plan will also set out a series of measurable objectives to ensure that the plan can be effectively and appropriately monitored.
Audit committee charter
The audit committee charter provides a blueprint for the committee’s operations. It should be written to meet the specific needs of the organisation’s industry, objectives and culture.
The charter should clearly articulate the committee’s role and responsibilities, composition, structure and membership requirements, authority, and processes and procedures (for example, for inviting non-committee members to attend meetings), as approved by the board.
Social enterprises are commercially viable businesses driven by making a positive social impact.
They can range from organisations that operate singularly as social enterprises (for example, a cooperative or mutual society), to the extended trading business of an organisation that directs its profits towards further funding that particular organisation’s mission or purpose (for example, a line of second hand clothing stores).
What directors should consider before approving financial statements
Directors do need to remember that they are not expected to be experts in financial reporting requirements.
Nevertheless, a director’s duty is to ensure:
- appropriate expertise is applied;
- due process is sound;
- essential elements of the process are scrutinised and tested by directors.
Appointing a new director
Periodically an organisation will have to appoint a new director. The board’s role in appointing new directors is to present suitable candidates to members for election. In larger organisations, this task may be delegated to a nominations committee.
Generally, once a new director has been selected (the ACNC refers to this position as a ‘responsible person’), he or she gives formal signed consent to the organisation.
Boards often use committees to increase overall efficiency. Work can be delegated to committees to more effectively deal with complex or specialised issues, and to manage workloads by making better use directors’ time and expertise. It is critically important to recognise that committees only make recommendations for action to the full board, which retains collective responsibility for decision making.
Committees also provide opportunities to develop knowledge within an organisation. Members can focus their skills in areas that will most benefit the organisation, and conversely committees help develop talent and support a leadership pipeline.
Legislation regulating fundraising is currently set at state and territory level and the approach of each jurisdiction varies. It is duplicative, inconsistent and complex and in this sense a program of national harmonisation is required. The following reports support that Australia should adopt a harmonised approach to fundraising legislation, to reduce the red tape burden for the NFP sector, but this has not yet occurred.
- Australian Institute of Company Directors, Charitable Fundraising Review, July 2016
- Deloitte Access Economics, Australian Charities and Notfor-Profits Commission Cutting Red Tape: Options to Align State, Territory and Commonwealth Charity Regulation, ACNC, February 2016
- Australian Government Productivity Commission, Contribution of the Not-for-Profit Sector, January 2010
- Further to this, there is no single definition of fundraising that is regulated by government. The following table provides a comparison of the current legal definitions used to define fundraising activities in the different states and territories:
Letter of appointment
Before a person is appointed as a director, they must provide a formal, signed letter of consent to act as a director to the organisation he or she is joining. The organisation usually responds with a letter of appointment. However, this is not a legal requirement. The appointment letter affords an opportunity to provide the new director with more information such as details of the duties and responsibilities associated with the role and available resources. The letter is usually signed by the chair of the board.
It is important to ensure that the contents of the letter of appointment do not conflict with the Corporations Act 2001 or the organisation’s constitution.
Reporting to the board
S 180 (2) (c) of the Corporations Act 2001 (Cth) creates a responsibility for directors to keep themselves informed, and one of the biggest challenges a non-executive director faces is how to access the information they need, verify its reliability and use it to make sound decisions.
Many boards rely heavily on the information provided by senior management. Although in many circumstances it may be appropriate to rely on this information, directors must take responsibility for the way they receive information and the level of detail this information provides.
Types of incorporation
The purpose, or primary objective, of an NFP may be to pursue a goal or special interest in a charitable, social, educational, professional or religious cause. Examples include schools, churches, sporting clubs and membership organisations representing professional groups.
Any surplus generated by an NFP cannot be distributed to its members, including any excess assets on wind-up. Surpluses must be put towards advancing the purpose for which the organisation was established.
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