For love or money: the challenges of not-for-profits
Many CAs volunteer their skills to not-for-profits, but the sector brings a specific set of financial and governance issues.
- CA ANZ members play a critical role in bolstering the skills and experience around board tables in the not-for-profit (NFP) sector.
- NFPs often lack the financial resources and staff to help navigate financial issues.
- Smaller NFPs face greater governance challenges and a greater risk of financial instability.
By Susan Muldowney
When Meredith Scott FCA, then a senior audit partner with EY, first got a phone call from the chair of Opportunity International Australia asking her to apply to be their next chief executive, her initial reaction was to say: “I’m sorry, but I don’t think you can afford me”.
However, she said yes to a coffee – and several meetings later agreed to take a more than 60% pay cut to accept the role.
Meredith Scott FCA.
Scott says she made the decision after careful reflection about how she could best spend the remaining 10 to 15 years of her executive life in a way that aligned with her values.
“I was a member of the EY Global Advisory Council when we developed the catchphrase ‘Building a better working world’, but in the end I didn’t actually feel like I was building a better working world... I felt like I was cleaning up other people’s messes and making rich people richer,” she says.
For more than 32 years (19 as partner), Scott had enjoyed a “wonderfully rewarding” career as an auditor, but 2017 had been very challenging. She had worked gruelling hours leading forensic investigations after a significant fraud at one of the firm’s clients.
Changes on the home front also meant the timing was right to make a career change. With her children grown, for the first time in 21 years Scott no longer needed to employ a nanny or cough up for private school fees.
In April 2018, Scott started as CEO of Opportunity International Australia, a microfinance and community development provider. Since then, she has undertaken a full risk review, instigated a performance management overhaul, performed a strategic review of the markets the organisation operates in and a review of all its partners. She also made a key appointment to the new role of chief philanthropy officer – who is responsible for ensuring the fundraising, communications and marketing teams are strategically aligned.
Scott has identified six strategic priorities for the organisation, by far the most important of which is to boost donations so they can help more people. (Opportunity International Australia’s operating revenue in FY 2018 was A$13.5 million.) These are all examples of ways she has brought the discipline of a chartered accounting mindset to the not-for-profit (NFP) world.
She admits her style initially met with some resistance from colleagues who told her “that’s not how things are done in the NFP sector”.
“Probably the biggest issue that I see in NFPs, and not necessarily here [at Opportunity International Australia], is that gap between people’s capability and their role description, usually because they want to help,” says Scott, who worked with many NFPs as an auditor and is also deputy chair of Wesley Mission and Pymble Ladies’ College in Sydney.
“Probably the biggest issue that I see in NFPs… is that gap between people’s capability and their role description, usually because they want to help.”
How can CAs bring financial discipline to NFPs?
In late 2016, self-described “corporate warrior” Meghal Shah CA took up a voluntary role on the board of BCD Community Care, an NFP providing aged care and support for people with disabilities in New South Wales.
He was motivated by wanting to do more for the community and to help boost the board’s financial acumen with the skills he’d gained in the commercial world. Shah never imagined how vital these skills would turn out to be.
BCD was on the brink of financial crisis. The National Disability Insurance Scheme (NDIS) which was rolling out across Australia had shifted market conditions, but BCD was not prepared for the magnitude of change required to thrive under the new model. Revenue was depleting and, as a small NFP with a team of 50 serving 140 vulnerable clients, it lacked the financial reserves to support it through the tough times ahead.
Meghal Shah CA .
“What I discovered about the not-for-profit world is that you’re dealing with the same headwinds as the for-profit sector and the waves are just as big, but you have a much smaller ship,” says Shah, who went on to successfully steer BCD through troubled waters as the organisation’s CEO. “You need to do more to make sure it’s stable and still heading in the right direction.”
“What I discovered about the not-for-profit world is that you’re dealing with the same headwinds as the for-profit sector and the waves are just as big, but you have a much smaller ship.”
After 10 months as CEO of BCD Community Care, Shah handed the reins to a successor and has since returned to working in the financial services industry. He remains a volunteer director.
Shah believes his training as a chartered accountant helped him to quickly “get to the heart of what the problems were” during his time as CEO of BCD. Shortly after taking on the role, he put in place processes to reduce overhead costs by 10%, shifted the organisation’s strategy to align with the NDIS model and identified an acquisition opportunity that boosted BCD by 150%.
“Maintaining good financial hygiene is at the heart of improving community wellbeing – you can’t advance a worthy cause unless you’re financially sustainable,” Shah says. “We had a mantra in place at BCD that we wanted to be small enough to be personable but large enough to be sustainable. Sustainability includes driving down overhead costs to a point where it meets both community expectations and governance requirements.”
Governance is a two-edged sword
Like for-profit companies, NFPs operate with varying levels of sophistication. The Smith Family, for example, had a net operating income of A$110.5 million in 2017-18 and, in the past year, has helped more than 143,000 disadvantaged children and young people across Australia. It has an enterprise-wide risk policy and employs a senior risk officer.
“We’re aligned to purpose rather than profits, but you do need to be comfortable that you have all the appropriate checks and balances to make sure that we preserve the trust and respect of our stakeholders,” says Mark Johnson FCA, a director of The Smith Family and former PwC Australia CEO. “My headspace is not terribly different to what it is with a public company.
“In not-for-profits, the challenge is always the resources. You’re trying to keep your costs down because you want to make sure that every dollar you make, you’re spending as much of it on your primary purpose and not on administration or other things.
“We’re very focused on trying to be as lean and as efficient as we can, but that gets harder every year with the demands and requirements of regulators and the community in terms of standards.
“At The Smith Family, the team has been very focused on measurable outcomes. The fact that we’ve been successful in demonstrating, in a very practical way, how we’re meeting outcomes has been a key contributor, I think, to [building] confidence and trust. And that has led, frankly, to increases in corporate sponsorship, donations and government support.”
What are the big challenges for small NFPs?
While the basic principles of good governance – such as prudential risk management, clear strategic objectives, sound financial management and transparency to stakeholders – apply to all organisations, NFPs have distinct differences to their commercial counterparts, and it’s exacerbated in smaller NFPs.
One of the academic research projects to receive funding support from CA ANZ in 2019 has been the Small NFP Governance Research Project – a collaboration between Macquarie University academics Professor Nonna Martinov-Bennie FCA and Dale Tweedie, and the University of Western Australia’s Professor David Gilchrist FCA.
The researchers’ preliminary findings make it clear that small NFPs, which they define as those with less than A$10 million revenue, face distinctive governance challenges.
A greater reliance on fewer funders presents particular risks of financial instability and cash flow. Limited access to specialist financial or human resources skills creates greater challenges in implementing robust governance controls. The study also notes that small NFPs often have limited time, skills or resources for longer-term strategic planning.
“Not only do small NFPs often not have the financial resources, often the directors are there for reasons that might be relative to their family’s interest, which means they don’t typically come with strong governance backgrounds,” says Gilchrist, a member of the CA ANZ Charities and Not-for-profit Advisory Committee in Australia. “In many cases, their system of governance focuses on issues that are clinically based rather than financially based.”
While there is no evidence that NFP governance is more or less effective than similarly sized for-profit organisations, poor governance in NFPs can impact the public’s willingness to support them via donations, says Gilchrist. It can also affect vulnerable people reliant on their services and support.
“There is a community expectation that NFPs be governed really well and be accountable for every single dollar in the organisation,” he says.
How can NFPs guard against fraud?
Irregular cash flow, however, is just one of the challenges facing small NFPs. Gilchrist says a lack of segregation of duties and a culture built on volunteerism and trust can also leave small NFPs vulnerable to fraud. Data from the Australian Charities and Not-for-profits Commission (ACNC) shows 10-15% of Australian NFPs had suffered fraud in the past two years.
Recent high-profile fraud cases include former Keep Australia Beautiful NSW chief executive David Imrie, who last year pleaded guilty to using the charity’s money to pay off personal debts, buy shares in racehorses and book an overseas holiday.
In March, former RSL NSW president Don Rowe faced court over charges of alleged misuse of his corporate credit card to cover personal expenses (the case continues in August). In July, two trustees of Christchurch-based disability support charity Alpha Support Centre Trust, Cecilia and Alfonsus Ellenbroek, pleaded guilty to stealing more than NZ$565,000 from the charity and spending it on holidays, jewellery and concert tickets.
Whenever stories like these hit the headlines, those who support NFPs are rightly outraged. It damages trust, not only in the organisations that have been victim to the fraud but the whole charity sector. Scott observes that while fraudulent activity occurs in every sector (something she witnessed in her 32 years as an auditor), NFPs are held to a higher moral account.
“Unfortunately for the NFP sector, it seems to be a little more sad when it happens because people have put their faith in the organisation because they want to do the right thing, as compared to shareholders that may want a return. So if somebody then doesn’t do the right thing with their money, that seems to smart a lot more.”
NFPs must jump a higher bar
Justine Smyth FCA.
Justine Smyth FCA, a professional company director and chair of Breast Cancer Foundation New Zealand, says limited resources place great pressure on governance models in NFPs of all sizes.
“You can’t pay for layers and layers of people because that also takes up resources that you need to deliver to your stakeholders. Public companies have a responsibility to shareholders, but not-for-profits also bear a kind of an emotional accountability, so I think the bar is set a little higher.”
“You can’t pay for layers and layers of people because that also takes up resources that you need to deliver to your stakeholders.”
While passion for the cause is vital to NFP work, Smyth says it has potential to compromise standards of governance.
“Passion is often the glue that brings the board together and it can result in a board that is highly galvanised,” she says. “I’ve also heard of cases where the zealot-like passion of some can actually interfere with the effectiveness of a board. If you’ve got people who are passionate and willing to volunteer their time, but perhaps their contribution or the way they interact isn’t ideal, it could also make performance management a bit harder.’’
Craig Fisher FCA, a consultant with RSM New Zealand in Auckland, has been involved in the NFP sector for decades. He is currently chair of the Fred Hollows Foundation in New Zealand, and a trustee of Sustainable Coastlines Charitable Trust. He notes that like any legal entity, NFPs must manage the increasing complexity of regulations.
“Think about health and safety legislation, which has been significantly strengthened in both New Zealand and Australia over the past 15 years,” he says. “It has put more direct responsibilities and liability on those ultimately responsible for an organisation, which is the governing body. A lot of NFPs – especially small ones – start off with a hiss and a roar and then they get gradually beaten down by all of the compliance and reality of what it takes to be sustainable.”
How active are CAs in the NFP sector?
CA ANZ does not have data on how many of its more than 120,000 members volunteer with NFPs, but there is no doubt that it is common and that the CA community plays a critical role in bolstering the skills and experience around board tables in the sector.
“Anecdotally, we are confident that a very significant proportion of our members are involved with the NFP sector in some capacity – whether that’s as volunteers, pro bono auditors, or as board directors,” says CA ANZ manager member engagement Catherine Kennedy.
In a 2016 survey, 1,976 CA ANZ members said they donated an average of 3.2 hours of their time each week. These contributions were long term, with many members reporting they had maintained a relationship with a particular NFP for more than a decade. The nature of their support went beyond traditional accounting services to mentoring, governance and risk management. The survey also found that CAs tend to volunteer more of their time later in their careers and post-retirement.
At the time of writing, CA ANZ was canvassing the members of its Charities and Not-for-profit Advisory Committee about issues relevant to remunerating board members. This will inform a CA ANZ Insight Paper on NFP board remuneration to be released this year.
“Many people hold a very strong view that NFPs should put every dollar at their disposal towards their core purpose, and as such all their board directors should serve on a voluntary basis. However, there are also circumstances in which NFPs should be able to pay directors to enable them to get the balance of skills they need to ensure sound governance,” says Kennedy.
“We don’t want to tell NFPs whether they should or shouldn’t pay their directors, but rather we are looking to provide some helpful guidance around how they might navigate that decision and ensure there is transparency and consistency around board remuneration.”
The NFP director pay debate
Earlier this year, chartered accounting firm PKF surveyed NFPs in New Zealand to gauge attitudes around director remuneration. Of the 197 respondents, 55% stated that board members should be paid, largely due to a belief that this would attract higher calibre people with diverse skillsets and from a wider social demographic.
There was also a perception that paying board members would set higher expectations of accountability. The reasons for not paying board members were mainly focused around affordability, with organisations wishing to maximise the return to operational issues.
“If you’re going to pay NFP board members, there needs to be a clear reason for the figure you pay,” says PKF director Bernard Lamusse FCA. “For example, you may work out the number of hours they’re expected to work and pay them at minimum wage. At least that’s some kind of rationale. The biggest concern that I took from the findings is that only four respondents took board remuneration to their organisation’s annual general meeting to have it discussed and approved.”
“If you’re going to pay NFP board members, there needs to be a clear reason for the figure you pay.”
Johnson is one of those who does not believe NFPs should pay directors.
“If you felt that you couldn’t get the [board] skills then you might need to think about paying [directors], but my sense is there’s enough talented people prepared to give their time for free.”
However, there are many volunteer directors who believe the question is worthy of robust debate.
“Some NFPs are getting quite big yet may be applying an unsophisticated model of governance. It may have served to get them to where they are now, but not for where they may need to go,” says Fisher. “People seem to hold two views about NFPs – they expect them to demonstrate the highest levels of governance and be as efficient as possible, but they don’t think the board should be paid.”
What are the governance challenges in small not-for-profits?
One of the early findings from the Small NFP Governance Research Project, funded by CA ANZ, is that small not-for-profits (NFPs) deliver numerous services without the sort of resources needed for the specific governance challenges they face. The academics leading the project have reviewed existing governance resources and conducted focus group sessions with 27 NFPs across Australia with revenue of less than A$10 million.
Key findings from the focus groups include:
- Concerns over a ‘one size fits all’ approach. Public and policy discussions of NFP governance often fail to recognise the different context in which smaller NFPs operate, and therefore the differences in governance.
- Board skills and capabilities. Participants’ main governance maturity concern is attracting the right mix of board skills and capacities. While all NFPs need the right skill and capacity mix, smaller NFPs often rely on their board’s skills to fill gaps in operational expertise.
- Board performance measurement. Although some small NFPs have conducted formal reviews of board performance assessment, most use more ad hoc measures. There is no consensus about what constitutes a high-performing board.
- Funding and cash flow. Financial stability is among the participants’ most significant governance concerns. Issues raised include managing funding beyond 12 months and the challenge of diversifying funding. Paying board members has been considered by some NFPs, but there is no consensus view.
CA ANZ has a range of resources for members working and volunteering in NFPs. Learn more about financial reporting requirements that may apply when you work with charities.Learn more on not-for-profit reporting