End of financial year NFP director responsibilities
The end of the financial year (EOFY) is here and it’s a crucial time for not for profit organisations to make sure they have their accounting records up to date and are ready to meet their compliance requirements. But what are some of the NFP director responsibilities at year end?
Accounting For Good Account Managers David Colmer and Kathy Tung discuss the importance of director involvement and good governance, not just at EOFY, but throughout the entire year.
Corporations Act and ACNC Governance Standards
A good place to start is to highlight the Directors’ Duties as set out by the Corporations Act. Kathy explains that a director needs to be aware of their civil obligations and also recognise activities that are criminal offences.
“A director should be honest and act with care and diligence. Always have the best interests of the company in mind when exercising business judgement. Plus, they must ensure that the organisation does not trade while insolvent or be subject to any insider trading.
They are also responsible for the Directors’ Declaration that includes a solvency declaration – confirming that the organisation can pay its debts when they fall due – and that the organisation is in compliance with accounting standards and the financial statements are a true and fair view of the organisation’s finances.
In addition to the requirements under the Corporations Act, if your not for profit is registered with the ACNC, you will also have to meet the ACNC Governance Standards. Similar to elements of the Corporations Act, Standard 5 includes ensuring that the NFP’s financial affairs are managed responsibly and not allowing the charity to operate while insolvent.”
Governance vs management
There is a clear distinction between the governance of an organisation and its management. David explains that governance is looking at the big picture, whereas management is responsible for getting things done.
“An organisation’s Board or Management Committee is responsible for its governance. The directors oversee the strategic direction, and they are tasked with identifying and managing any potential risks. Part of their role is to monitor performance and make sure there is progression towards the strategic direction they laid out.
The Board is usually working on a time horizon of three to five years because they are focused on growth and development, rather than the day-to-day execution of activities. But in both the Corporations Act and the ACNC Standards, the buck stops with them.
It is their duty to make sure they have the right management team and that there are sound structures in place to keep management accountable.”
In comparison, management is the team – however small that might be in each organisation – of people charged with running the organisation. The Board sets the direction and management figures out how to achieve the goals. Management tends to focus on organisational planning one to two years in advance.
EOFY is too late
By the time EOFY rolls around there’s not a lot a director can do to change the course of the financial results. It’s far too late, and there’s no magic switch to flick that will improve the organisation’s position. Kathy says:
“As a director, you need to be across the financial aspects of the organisation throughout the entire year… it’s not just a once a year thing… it’s not a middle of June thing… or a 10 minutes to midnight thing! It’s a constant responsibility – all year long.
But having said that – there is something that happens once a year and that is your audit.”
Not for profit audit
We need to note that not all NFPs are required to undergo an annual audit. The ACNC clearly outlines if an audit is necessary but some organisations could still choose to be audited, especially if it’s needed in order to access funding or other requirements.
An audit is the examination of an organisation’s financials. It is completed by an independent auditor who has no connection with the organisation. And it happens at the intersection of the Corporations Act, Accounting Standards and Audit Standards. David explains:
“Auditors express the opinion that, on the whole, the financials are a fair representation of the position of the organisation.
Bear in mind that auditors are not engaged to detect misstatements or fraud, but they do keep an eye out for it. Just because an auditor has been through the books is not a guarantee that there’s nothing awry.
Auditors will look at areas where there is a risk of misstatement and then test the controls that address that risk. If the controls are poorly designed or do not work as intended, they may need to go further and test at the transaction level.”
As previously mentioned, not for profit directors are responsible for signing the Directors’ Declaration which includes:
- Solvency declaration – that the organisation can pay its debts when due
- Compliance with accounting standards
- True and fair view of the organisational finances.
Signing this declaration occurs at the end of an audit. It’s not expected that directors are completely familiar with every section of the accounting standards; you can rely on your auditor’s assessment for that aspect.
The most important thing is that each director must be individually satisfied with the statements made in the declaration. Kathy says:
“Each director has a duty of skill, competence and diligence in the understanding of the financial report. You can’t outsource this… or sit back and rely on someone else.
Ask yourself – can you ascertain the information you need to make the declaration from the financial report? Is the information in the report consistent with your knowledge of the company’s financial position? Are the material matters known to you included in the report?
If you can, in good faith, answer yes to these questions, then you are likely to be in good standing.”
Not for profit accounting experts
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