Not-For-Profit Sector Reforms – Governance Update

In our first blog on this subject in October 2011 we provided a high level summary of the proposed Not-For-Profit sector reforms. At this time the message was very much “wait and see” as Treasury and the Not-For-Profit Council were making quite a lot of noise with seemingly little output.

So, where are we now with the proposed commencement of the new national regulator for charities and Not-for-Profits, with the Australian Charities and Not for Profit Commission (ACNC) being less than 5 months away, on 1 July 2012?

Well the good news is that we have seen numerous timelines, draft consultation papers and factsheets summarising the consultation papers.  The bad news is that the whole process seems in danger of confusing itself, with the final shape of governance requirements and level of regulation due to commence on 1 July 2012, still being as clear as mud.

Is The ACNC Actually Going to Commence Operations On 1 July 2012?

Yes it appears so!

If Yes, What Is the ACNC Going To Do?

From 1 July 2012 the ACNC should have the power to register charities, and oversee the good governance of both the new ones it registers as well as charities which are already registered with the ATO (these will be “transitioned” to the ACNC).

At this time the ACNC should also take over from ASIC the governance arrangements for charities which are companies limited by guarantee. Despite its name, it will be a while before the ACNC is expected to regulate other Not-For-Profits.

What Types of Powers Will the ACNC Have?

It looks as though the ACNC will have Australian Securities and Investment Commission (ASIC)- like powers, with the failure to comply with its requirements leading to formal warnings, formal directions, injunctions, and suspension or removal of directors and officers (“corporate responsible individuals”).

And the biggie: the ACNC will apparently have the ability to revoke a Not-For-Profit’s registration.

ACNC inspectors (with warrants or with consent) will be able to enter premises, inspect anything including documents, IT, take copies of anything, and even to “secure” things for up to 24 hours if they have reasonable grounds to suspect that it will be concealed, lost or destroyed  and it contains evidence of a breach of the legislation.

What Sort of Governance Structures Will Not-For-Profits Need To Put In Place?

With all these warrant-wielding ACNC inspectors wandering about, what exactly are the governance requirements that Not-For-Profits will have to put in place?

The Treasury released a Consultation Paper on 9 December 2011 titled Review of Not-for-Profit Governance Arrangements, which neatly covered the holiday period with submissions closing on 20 January 2012. Not that the contents were very revealing.  The paper outlines a series of in-principle statements about organisational governance rules being proportional and tiered and taking into account:

• The size of the entity
• Its risk factors
• Receipt of public and government assistance

It also provides some insight into how the legislation will deal with its general approach to governance, directors and officers responsibilities, risk management, financial reporting and audits.

What Type of Approach Will the ACNC Take to Governance?

The not unsurprising message that comes through in the various documents is that the new legislation will be incorporating a “principles-based” approach to governance. This is exactly the approach that has been adopted by the ASX and also to a lesser extent by ASIC and other regulators such as AUSTRAC. Its intention is to mandate a high level outcome but be flexible in the mechanism used to achieve that outcome.

Whilst we agree with the principles- based approach, especially in the Not-For-Profit sector which incorporates a huge number of organisations of different sizes and degrees of operational complexity, it will be interesting to see how the ACNC approaches compliance and enforcement. These are in our view the major failings of the current ASX and AFSL licencing regimes.

Appointment of Responsible Individuals

The consultation paper introduces the concept of “responsible individuals” whose responsibility is towards donors, beneficiaries, volunteers, government, members where applicable and the public at large. The concept of a “responsible individual” closely mirrors the definition of officer and director in the Corporations Act (and the model Work Health and Safety legislation).

A Responsible Individual must act ‘with care and diligence’, ‘in good faith’, and must not misuse their position, including misusing information and conflicts of interest. There is some discussion in the consultation paper of what would be the appropriate level of disclosure of conflicts of interest, and this formed one of the questions for consultation.

Risk Management & Compliance (Internal Control) Programs

As with other “principles-based” governance regimes, it is likely that Enterprise Risk Management and Compliance will take a particularly prominent role under the ACNC regime, given the flexibility of these particular management disciplines to be implemented by organisations of all sizes and levels of complexity.

The draft papers published to date indicate that the ACNC will require (probably tiered) risk management and compliance strategies involving processes and procedures to identify and control the risks of:

• Fraud
• Mission drift
• Compliance with its own governance rules
• Legal compliance
• Asset management

Reporting

Annual reporting by registered charities to the ACNC will commence on 1 July 2013, based on the 2012/2013 year. An annual “information statement” must be provided by all the entities, and large and medium organisations will also need to provide a financial report. Contents of the “information report” are still extremely fuzzy, but will be “proportionate”.

A large amount of detail has been provided with respect to financial reporting.  This is most likely due to the fact that the ACNC will be taking over the financial reporting requirements for medium to large charities from ASIC from 1 July 2013. The Draft papers provide for three classes of organisation dependent upon their annual revenues and their Deductible Gift Recipient status (DGR).

• “Small organisations” as defined, do not have DGR status and their revenue is less than $250,000 pa.
• “Medium” organisations either have an annual revenue above $250,000 but less than $1 million, or who have DGR status and an annual revenue less than $1 million.
• “Large” organisations have an annual revenue above $1 million

The Draft Exposure Bill even goes as far as including samples of the information which will need to be provided by the different classes including “mini-disclosure” for organisations with annual revenues of less than $250,000.

Audit

Requirements for auditing are likely to be determined by the size, activities, and levels of receipt of donor and government funding, but they range from auditing for large organisations to “reviewing” for smaller organisations.

So What’s The Timing For All These Changes?

Well this is the billion dollar question!

As usual it looks as though the government has left its run very late (this from our experience is a trait of all governments, Federal and State, Labor and Liberal).

The draft Bill establishing the ACNC still does not include governance requirements, arguably the most significant reform to come out of the whole process.

The outcomes of the consultation on the Review of Governance draft paper (public submissions only closed on 20 January 2012), are currently in “targeted confidential consultation”.

There is no mention of when the draft bill will be prepared except that there is frequent reference in the Treasury factsheets to the need to have the legislation passed in the first quarter of 2012 to enable the ACNC to commence on 1 July 2012. However, at the recent community consultation sessions conducted by the ACNC Taskforce, the timeline has slipped to “being passed in the first half of 2012”, with some further drafts to come out around Easter 2012.

Is there any realistic chance that it will be debated and passed by both Houses before 1 July 2012? Given these significant obstacles, it’s likely that the ACNC is in a very minimalist state at the moment, standing at the ready, at a moment’s notice to don its armour and sally forth into the world of Not-For-Profit regulation.

What Won’t Change?

Whilst all these changes are mooted, it is always important to understand what won’t be changing. In this case:

• The ATO will still determine eligibility for access to Commonwealth tax concessions with “special conditions”;
• Grants and assistance to NFPs will still vest with current Commonwealth agencies
• Charities which are companies limited by guarantee  will still need to be incorporated with ASIC and will need to report to them until 1 July 2013, and
• The definition of “charity” will not change until 1 July 2013, with new enabling legislation.

For more information please contact CompliSpace on +61 2 9299 6105 or contactus@complispace.com.au