Four years down the track from its formation, a government commission that offers a one-stop shop for information on charities and NFPs have done little to ensure the integrity of spending in the sector.
The Australian Charities and Not-for-profit Commission (ACNC) was set up in 2013 to address long-held concerns over appropriate governance and working practices in a sector that accounts for a significant proportion of Australia’s economic activity – about 12 per cent of GDP. Known as the third sector, it was until then governed by fragmented state and taxation regulations.
More than 54,000 charities and NFP entities are now registered, and no doubt there are others that are not registered. And all of them are vying for a piece of an ever-diminishing funding pool, with the largest one grabbing 75 per cent of the sector’s income.
Three main sources of income in the sector were cited in the 2015 Charities Report – government grants (about 41.4 per cent), donations and bequests (about 8.3 per cent) and “other income” (about 50.3 per cent). These amounted to $134.5 billion that year.
Largely unregulated
While government grants and donations and bequests are highly regulated, the “other income” catch-all is largely unregulated and comprises income received from sales, user contributions, member fees, interest and such. Also included is income from fundraising.
Given the entities making up the third sector, it is not surprising that about 56.2 per cent of their spending goes on employees. Indeed, wages are the biggest single expense for many organisations that receive government grants, such as aged care and higher education. Then again, “other expenses” – amounting to more than $48 billion in 2015 – would include the costs of raising funds. Interestingly, the sector spent about $12 billion less than it received.
So what is the difference between receiving donations and fundraising? This has been a tricky question, and regulation is nuanced and varies from state to state. Broadly speaking, a donation is a gift where the donor receives no material benefit or advantage. As the report numbers suggest, donations are only a small proportion of income in the sector.
Fundraising, however, accounts for a large proportion of income and has been the source of much tension and criticism, including a high profile in the recent review of the Australian Consumer Law. Issues for the third sector centre on consumer law being applied to fundraising activities. Can people who contribute funds be classified as consumers?
Fundamental flaw
According to the review, there is a fundamental flaw in regulating Australia’s third sector: the priority given the income of charities and NFPs with little regard to how these funds are spent, except, of course, grant funds. All other income is discretionary, as is the spending. This side of the equation is largely overlooked.
As an example, let’s look at the Shane Warne Foundation (TSWF) debacle. Warne closed the charity early this year under threat of de-registration by the Victorian regulator, bringing to an end several years of accusations of wrongdoing and public outcry.
In 2014, the charity spent $281,434 to raise $279,198. On top of that, its employees cost $133,490 that year. While the charity was formally cleared of wrongdoing, it is clear that regulators are powerless to help stakeholders in ensuring that funds raised go to the charity beneficiaries. In this case, much of the money raised was spent on lavish events.
Warne’s charity is an archetypal example of poor governance and management. Arguably it was established in a bid to clean up the sports star’s public image.
‘Shining success’
Staying with cricket, the McGrath Foundation is touted as a shining success in terms of its contribution to its purpose. In the same year, it received $1,338,910 in donations while fundraising generated $4,297,688 in revenue. It cost the foundation $2,672,548 to raise those funds, with the charity incurring $1,065,321 in general and administrative expenses.
Surely we still need to question why more than $2.5 million was spent to raise about $4 million.
One charity (TSWF) is vilified in the court of public opinion, while the other spends about 10 times the resources on raising funds and is lauded for its charitable works. Is it because of Warne’s bad-boy image, and because of McGrath’s personal tragedy? Or is it the result of more transparent governance and reporting providing accountability for the funds raised?
The answer is accountability. Charities enjoy community sanction along with tax concessions. While small charities and NFPs suggest that compliance activities take resources away from their charitable purpose, that sanction, along with the ability to freely spend funds raised, requires as a quid pro quo transparency and accountability around that spending. This is where the current regulatory framework is weak.
Little enforcement
Only large charities bear the burden of full compliance, and until recently there was little enforcement. In January, more than 3000 charities were more than six months late in providing basic information to the regulator. In April, 586 charities were de-registered for not providing information for two consecutive years. Among this group were several large charities with assets reported in the millions of dollars.
There are two fundamental tenets of charities that directly relate to fundraising and the spending of the money raised. First is the notion of a charitable purpose. All charities should be compelled to provide information that clearly explains how much of their income, and in particular revenue from fundraising, goes toward their charitable purpose. What beneficial outcomes arise from the spending? Where is the community’s “value for money”?
This is clearly articulated in the reporting of the McGrath Foundation, and no doubt one of the reasons for its success.
Second is the notion of a responsible person. Those heading up charities, who manage their assets and spend their income, need to be held responsible or accountable. While Shane Warne did not break the law, there is little evidence to suggest he behaved responsibly in the use of the funds contributed to the charity bearing his name.
Dr Sandra van der Laan, Professor of Accounting, University of Sydney Business School.