Australian Charity Regulation

If you’ve ever donated to a charity, you will have done so with the expectation that they will use your money to make an impact in their chosen field. But how do you know for sure that the charity is being honest and efficient with its funds? The answer lies in charity regulation and reporting.

In Australia, the Australian Charities and Not-for-profits Commission (ACNC) regulates charities. To have and maintain charitable status, charities must meet certain standards and provide Annual Information Statements (AIS) and/or financial reports. Requirements vary for charities based on how much revenue they receive, but all charities have to report to the ACNC. The information charities submit is publicly available from the ACNC Charity Register, enabling donors and interested parties to find important information.

However, the information which the ACNC requires from charities is limited, and it does not always contain the information important to donors. The Governance Standards are high-level principles not Charity regulations. Many charities find it difficult articulating to the public how they are complying with the high-level principles of the Governance Standards. Therefore, a donor may not have the necessary information to compel their donation. At a time when trust in the sector as a whole is declining, it is important charities are open about their activities.

What is charity reporting?

There are several reasons why statutory or independent bodies exist to regulate and examine charities, and why they require charities to report information about themselves to be analysed and released to the public.

Firstly, and importantly, it deters charities from acting illegally – if charities know their organisations are scrutinised by the public and governmental bodies who have the power to expose or sanction them, they are incentivised (legally) to act responsibly. This also serves the wider purpose of maintaining trust, since higher rates of fraudulent activity would reduce trust and potentially the level of philanthropy (Cordery & Deguchi, 2018). Regulatory bodies such as the ACNC are perhaps the most important audience for charities, as they enforce penalties for inappropriate activities.

Secondly, charity reporting is important for charities, it ensures some measurement of their performance and impact, whether financial or otherwise. It can help evaluate their progress towards their mission and to work out where to allocate resources more effectively (McConville & Cordery, 2018; Lumley et al. 2011).

Finally, reporting is vital for those who donate to charity, whether individuals or organisations. It allows those who have donated to a charity to track its progress and thus, theoretically, the impact that their donation may have had – it’s natural to expect some type of accountability. On the other hand, it is very useful for donors to be able to look at a charity’s past performance and current activities to help them with their decision.

These are relatively disparate purposes and audiences, which makes it difficult to design a system of charity regulation which is, at the same time, manageable for charities, especially small ones which may not have the resources to gather large amounts of information, make it useful for the intended audience and regulators to require an adequate amount of information

What kind of information is reported?

In most systems of charity regulation, including Australia, the main form of regulation focuses on financial reporting. At the most basic level, sources and sizes of income and expenditure are always required, as a way of measuring a charity’s size, rate of growth and how it goes about seeking and spending its money. Financial measurements of charities are generally sought by all audiences, since they can be a good barometer of detecting inefficiency and fraud, as well as identifying projects and outputs where donations may be used.

In particular, a measurement called the ‘overhead ratio’ (the proportion of a charity’s expenses which are used on administration, fundraising and other purposes which are not directly pointed towards the stated programs achieving their mission) has become particularly popular to report as a means of judging a charity’s performance. Even though this may not be a particularly good mechanism to judge a charity’s efficiency or impact (for more information, see our article on the Overhead Myth), it can be a useful figure for donors and regulators to examine.

Though the first things which regulators seek out in charity reports are financial data points, some systems go beyond this to seek out non-financial information, looking at information such as stated missions, particular activities, notable results and outcomes, and stories. The rationale behind this is that the purpose of measuring charity information should be to measure a charity’s impact, and finances do not tell the whole story. In the United Kingdom, for example, charities are encouraged to ‘tell their story’ and to give some consideration of the impact they have made, rather than simply listing incomes and expenses (McConville & Cordery, 2018).

What is the problem in Australia?

Donors and those interested in seeing charities well-regulated want to receive enough information to ensure their money is being well-spent. Unfortunately, there are a few ways the system does not fulfil its purpose to the extent that some donors might expect.

Firstly, the burden on charities is difficult to manage. Not only is there duplication of work due to state and federal regulation, but it is also not always clear what charities must provide in their reporting. Charities self-assess the information they should provide, based on geographical location, purpose and size, meaning some charities must provide more information than others. Despite the public’s desire to ensure that administration costs of charities are minimised, the average burden to comply with regulatory requirements is $108K per annum (AASB, 2017).

Despite the onerous burden on charities, there is also the problem that information which is requested may not be fit for purpose – it is almost exclusively financial in nature, with almost no non-financial information required. As McConville and Cordery (2018) compare Australia’s system with New Zealand, the United States and the United Kingdom, the Australian system represents an extremely data-driven legislative approach, where numerical methods are prioritised, and there is little consideration for those who read the reports aside from what legislators might need.

Thus, when donors seek reports on the ACNC website to find important information about charities, there may only be basic financial data available. This information can be useful in certain circumstances. Recently, the ACNC has asked charities to describe their operations and programs by describing how they achieved their charitable purpose. This is a step in the right direction, but we hope to see these descriptions for every program listed and even allude to this in the financials, by indicating how their actions impacted their beneficiaries.

Are independent watchdogs needed in Australia?

From our perspective we think independent watchdogs are needed. The ability to determine the impact of a charity compared to its financial situation would benefit the Australian charity sector. As mentioned earlier, reporting is left up to the individual charity, making comparisons almost impossible. The scope of the Australian charity sector is very large and the playing field is not even (see our article on big vs small charities).

Rittlemyer (2014) agrees that Australia would benefit from charity evaluators, as government regulators have little authority over minor offenses that some charities commit. While independent evaluators can ask for more information from charities to establish a higher level of transparency and take into account the positive impact they are having in the community. Rittlemyer also suggests no government regulator should attempt to offer ratings of any kind, especially relating to effectiveness. This has resulted in very few of these entities operating in Australia and is why no large scale independent evaluators have moved into the Australian market. Giving Guide has made it their mission to help the donors and charities of Australia to embark on a new standard of charity reporting and analysis. The bar needs to be raised.

What can Giving Guide do?

Giving Guide wants to provide easy and useful ways for donors to find Australian charities and get the most out of the available information. Giving Guide has an information page for every ACNC registered charity, where you can see what information is available and get an idea of the financial and governance of the charity. We have also included charitable information from the Australian Business Register.

However, the collection of information by regulators and what charities produce is limited. It is usually numerical data, and does not go towards measuring the impact that charities have in their chosen mission field.

Our long term goal is to provide a service to both donors and charities which encourages trust, transparency and accountability. We want donors to understand the complexity of the charity sector and give based on merit. Thereby, encouraging charities to provide more information, so donors can make an informed choice on how they engage in philanthropy in Australia.

Onwards and upwards,

Guide

Helpful Resources:

AASB Discussion Paper: Improving Financial Reporting for Australian Charities (2017).

Cordery & Baskerville-Morley, Charity Financial Reporting Regulation: a comparison of the United Kingdom and her former colony, New Zealand (2005)

Carolyn, C., & Masayuki, D. (2018) Charity registration and reporting: a cross-jurisdictional and theoretical analysis of regulatory impact. Public Management Review, 20:9, 1332-1352, DOI: 10.1080/14719037.2017.1383717

Give.org Donor Trust Report (2019)

Government Response to the Australian Charities and Not-for-profits Commission Legislation Review (2018)

Inspiring Impact, The Code of Good Impact Practice (2013)

Irvine, H. and Ryan, C. (2013), “Accounting regulation for charities: international responses to IFRS adoption”, Pacific Accounting Review, Vol. 25 No. 2, pp. 124-144. https://doi.org/10.1108/PAR-03-2012-0009

Lumley, T., Rickey, B. and Pike, M. (2011) Inspiring impact: Working together for a bigger impact in the UK social sector, London: NPC.

Mack, J., Morgan, G,G., Oonagh,  B.B. & C.J. Cordery (2017) Financial reporting by charities: a matched case study analysis from four countries, Public Money & Management, 37:3, 165-172, DOI: 10.1080/09540962.2017.1281638

McConville, D., & Cordery, C. (2018). Charity performance reporting, regulatory approaches and standard-setting. Journal of Accounting and Public Policy, 37(4), 300-314. https://doi.org/10.1016/j.jaccpubpol.2018.07.004

Mcdowell, E., Li, W. & Smith, P. (2013). An Experimental Examination of U.S. Individual Donors’ Information Needs and Use. Financial Accountability & Management. 29. 10.1111/faam.12017.

Murray, I. “Regulating Charity in a Federated State: The Australian Perspective” Non-profit Policy Forum, vol. 9, no. 4, 2018, pp. 20180034. https://doi.org/10.1515/npf-2018-0034

Philanthropy Australia, Review of the Australian Charities and Not-for-profits Commission Legislation (2018) (research)

Phillips, S. (2013). Shining Light on Charities or Looking in the Wrong Place? Regulation-by-Transparency in Canada. Voluntas: International Journal of Voluntary and Non-profit Organizations, 24(3), 881-905. Retrieved June 17, 2021, from http://www.jstor.org/stable/42629842