Charity Reporting Regime – Not A Level Playing Field

The Australian Accounting Standards Board (AASB) has weighed in on the complexity of the financial reporting regime for Australian charities in a new report, describing it as “overly complex and inconsistent” and saying it “fails to promote the sector’s accountability or efficiency”.

The research, Financial Reporting Requirements Applicable to Charities, found that despite ongoing simplification efforts, serious issues with the current financial reporting regime remained, with the result that there was “no level playing field for charities”.

It found while the charity regulator, the Australian Charities and Not-for-profits Commission (ACNC), had succeeded in harmonising financial reporting across some states and territories, “the underlying issue related to the reporting framework within which charities are required to lodge”.

The research comes as a precursor to the federal government’s planned review of the ACNC’s legislation which is due to start in December.

In reviewing charities’ financial reporting requirements in Australia, New Zealand, United Kingdom, Hong Kong, Singapore, South Africa and Canada, the AASB’s research found Australia had the most complex regulatory environment for charities.

AASB chair Kris Peach said Australian charities were covered by at least 18 sets of regulation and 10 regulators at federal and state level, with many charities having to answer to more than one regulator.

“Very little of that regulation is consistent and much of it involves different reporting thresholds and requirements,” Peach said.

“There is no level playing field for charities. Like charities have to produce different reports depending on their location, entity type and historic reporting choices. As a result, reports are unnecessarily complex and potentially irrelevant to donors and other stakeholders.”

The report said: “The rationale for some requirements, or for variation in requirements, is often not clear. For example, Queensland’s reporting requirements for co-operatives varies from all other states.

“There appears to be little focus on what information is most likely to be useful to the users of charities’ financial reports, or how charities can present that information in a way that helps them to explain their purpose and performance.

“As a result, charities have to spend time and money on preparing and, possibly, auditing unnecessarily complex and potentially irrelevant reports, without a corresponding benefit to their organisation or stakeholders. If a charity genuinely has no general purpose users and is not economically significant, requirements to publicly lodge financial statements impose an unnecessary burden.

“Another consequence is that there is no objective criteria for how a reporting threshold is determined, and therefore it is not clear when criteria and thresholds should be reviewed (for example, reviewing a revenue threshold in response to inflation).”

Peach said that as well as having the most complex regulatory environment, Australia was the only jurisdiction that required charities to “self-assess” as to whether they needed to produce full financial reports or “special purpose” financial reports.

“If they opt for special purpose reports, the information required in those reports varies depending on which regulations apply,” Peach said.

“The community isn’t getting clear and comparable financial information, and charities are having to spend time and money navigating a maze of onerous and inconsistent requirements.”

Peach said financial reporting requirements must balance the objectives of improving trust and transparency with the preparers’ costs and be easy to implement.

“We knew that there was a lot of different regulation that applied, but I was surprised about the actual extent of it and I was surprised at how different we are to overseas counterparts where they really do seem to have a much more streamlined focus for the charity sector,” she said.

She said a consultation paper would be released later this month to encourage discussion within the charity sector.

“This, coupled with outreach (events), in conjunction with the ACNC and state regulators is designed to inform stakeholders who will feed into the ACNC legislative review, starting in December this year,” Peach told Pro Bono News.

“This is a tremendous opportunity for all charity stakeholders to have their say on how to improve financial reporting in their sector. I encourage everyone to get involved,” she said.

“What the discussion paper will do is draw out in a bit more detail, the issues and benefits of change and how we might want to structure that change. We will then provide four or five options for people to consider.”

A coalition of more than 180 not-for-profit and advocacy organisations have been urging governments to reform fundraising regulations, which they described as a “total dog’s breakfast”.

Community Council for Australia (CCA) and Justice Connect led the charge to enact change as part of the national #fixfundraising campaign in 2016 and 2017.

Peach said it needed a concerted effort.

“What we are trying to do is set the scene for the ACNC legislative review, ” Peach said.

“The idea is to get people ready, at least from a financial reporting perspective, to be able to feed into that [government] review.

“We are trying to make sure this is a collaborative process with the AABS trying to facilitate the conversation and we can hopefully come up with something that is significantly better. We also need to bring in the state regulators as well because this whole process needs a whole lot of regulators all working together and not in isolation.”