Each year, charities play a vital role in supporting important causes and initiatives, relying on the generosity of donors and the trust of the public. To maintain this trust and ensure accountability in the sector, charities in Australia are required to submit financial reports to the Australian Charities and Not-for-profits Commission (ACNC).
The Annual Information Statement required from all charitable organisations serves as a comprehensive snapshot of the charity's activities, encompassing both financial and non-financial information. An Annual Financial Report is also required by medium and large charities to meet regulatory obligations, promote transparency, and provide valuable information to stakeholders.
Since 2015, the ACNC has reviewed the quality and accuracy of charities' Annual Information Statements and Annual Financial Reports. These reviews extend to disclosures such as related party transactions and key management personnel compensation disclosures, both of which are requirements for transparency and accountability.
The primary goals of these reviews are to:
- Enhance Data Quality: By improving the accuracy of information published on the Charity Register.
- Improve Reporting Standards: These reviews contribute to refining the Annual Information Statement and financial reporting guidance.
- Identify Trends and Errors: By examining the financial reports, the ACNC can identify trends and pinpoint areas that require improvement.
- Enhance Guidance: The findings from these reviews help in improving guidance on financial reporting such as the through the ACNC’s annual financial report disclosures – best practice guide.
Findings and Insights
The ACNC's latest review of financial reporting has revealed several noteworthy observations:
1. Compliance Improvements:
- 79% correctly identified the ACNC Act as the reporting framework, an 8% increase from the previous year.
- 97% of charities included a Responsible Persons' declaration, maintaining the prior year level.
- 74% of Annual Financial Reports contained a complete set of financial statements, showing improvement from 66% from the previous year.
- 91% of Responsible Persons' declarations were correctly signed and dated, up from 89% in the previous year.
- Less than 1% of Responsible Persons' declarations lacked the solvency declaration, a significant improvement from 5% in the previous year.
2. Accuracy Challenges:
- The accuracy of selecting the correct type of financial report in the Annual Information Statement decreased to 57% in 2021, down from 65% in the previous year.
- 15% of charities reported expenses using a mix of nature and function, down from 23% in the previous year.
- Errors in transposing 'revenue from government' and 'employee expenses' from AFR to the Annual Information Statement occurred in 4% of reviews.
3. Disclosure Challenges:
- Common disclosure issues persisted, including Inadequate or missing disclosure of the entity's for-profit or not-for-profit status, accounting estimates, and auditor/reviewer fees.
- 10% of assurance reports had modified opinions, but 54% failed to accurately report the modification in the Annual Information Statement.
- Only 3% of applicable charities disclosed related party transactions, while 14% of relevant charities' General Purpose Financial Statements (GPFS) lacked key management personnel compensation disclosure.
4. Streamlined Reporting and Compliance:
- 5% of charities embraced the General Purpose Financial Statements – Simplified Disclosure Requirements (GPFS-SDR).
- A significant shift toward audit reports was observed, with 98% of Annual Financial Reports including them, signalling a trend away from review reports as a form of assurance.
5. Financial Characteristics:
- The reviewed Annual Financial Reports included a breakdown of charities by size, type of financial statements submitted, location, and legal structure.
- The majority of financial statements reviewed (61%) were Special Purpose Financial Statements (SPFS), while 27% were General Purpose Financial Statements – Reduced Disclosure Requirements (GPFS-RDR).
Focus Areas in the Future
The ACNC remains committed to transparency and accountability, with future endeavours including:
- Enhanced monitoring of related party transactions and key management personnel disclosures, as these become mandatory in the Annual Information Statement for all reporters from 2022.
- Continued updates to ACNC reporting guidance and the Annual Financial Report checklist to aid charities in meeting their reporting obligations.
- Conducting webinars on financial reporting matters, promoting best practices within the charitable sector.
Prosperity’s Not for Profit team can assist in ensuring your organisation is well-prepared and fully compliant with ACNC's reporting requirements, helping you uphold transparency and accountability in your charitable endeavours.