thought leadership

Charitable industry at risk if standards reduced

Questions raised regarding basic registration requirements in the Department of Internal Affairs’ call for Charities Act 2005 submissions need careful consideration. There are 27,000 charities in New Zealand; they spend $17 billion and manage $58 billion in assets, so a basic level of standards is essential.

The Department of Internal Affairs has questioned whether requirements associated with maintaining registration are actually working. These standard requirements include maintaining charitable purpose, annual reporting, financial reporting requirements, compliance requirements along with considerations around Governance of the charitable organisations. These serve as the safety measures to ensure transparency within the sector and when executed correctly, they function well and serve an important purpose.

The DIA discussion document states many small charities struggle to meet these standard reporting requirements. Current financial reporting is managed under a 4-tier system based on expenditure incurred in the previous two years. Fifty eight percent of tier 4 charities (those with under $125,000 in annual operating payments) successfully met the minimum reporting requirements in 2018 and only 50 percent of all charities filed their returns on time.

Although it might be tempting to do away with a minimum standard for smaller organisations, a better approach would be to further simplify the systems in place that are set up to expedite the reporting process for smaller entities. The reality is that every charity should be able to report how much money it has.  Tier 4 reporting requirements are based on ‘Simple Format Cash Reporting’; it’s the most basic level of financial reporting possible and it would be reckless to lower the standards any further.

Kiwis are among the most generous people in the world when it comes to donating either their time or money they have spare to the causes that are important to them. There must be a basic standard to maintain public trust; removing this puts the whole charity sector at risk. If reporting isn’t timely and transparent, then the level of trust the public has in the sector will be severely diminished along with their investment generosity towards these charitable organisations.

Another suggestion made in the discussion document is to challenge the level of reserves and spending funds available; however, there should not be a measure of maximum reserves or donation levels because:

  1. there is no need for these measures if the organisation is maintaining transparency by adhering to their financial reporting requirements
  2. a call on cash to make payments may result in non-cash assets being sold to raise cash funds for distribution
  3. charities could be forced to make donations or payments for projects that otherwise wouldn’t get funding
  4. no other sector (with the exception of banking) is required to hold a minimum or maximum level of reserve
  5. to maintain the sustainability of the organisation, it is better to be taking a longer-term view rather than pay out reserves in the short term; this will allow governance to undertake a set strategy and utilisation of funding in accordance with a long term strategy.

There are some limited advantages; the charitable spend would likely increase within the sector and there would be some tier 4 organisations encouraged to use a level of the substantial reserves that they have built up. For example, the top one hundred tier 4 charities have over $800 million in assets, and many are old trusts that have gathered reserves over time and now pay out very little to the community.

An area where standards could improve is governance structure, currently it is questionable whether some organisations’ governance is fit for purpose. Many organisational founding documents haven’t been reviewed in decades or modernised which means in some situations the people being elected do not have the expertise required for the governance position they hold.

An alternative change for Governance we would encourage is to reduce the number of board member positions in organisations. Often, we see clients with an excessive number of board members and consider streamlining the number of seats at the board table would assist in the Boards usefulness to the organisation.

Another question posed in the DIA document is “Do you think the Australian governance standards could be adapted to work in New Zealand?”, is worth considering as a way of improving charity governance. In Australia there are minimum standards charities must meet to remain charitable, operate lawfully, and be run in a way where they are answerable for their actions. A formal leadership structure for all charities would help build a governance resource with depth that can serve both individual organisations and the wider society.

For the charitable industry to have a sustainable future, we must take stock of what is working and what needs to change. This is an opportunity to create a governing document that will nurture a robust and dynamic charitable industry that New Zealanders can trust.