Conflict of interest

Following robust procedures and keeping good records will help charities comply with new rules to manage conflicts of interest, writes Australian Charities and Not-for-profits Commissioner Sue Woodward AM.

It is a familiar scenario. A big charity would like to redevelop its website to make it more user- friendly for potential supporters such as donors. The CEO suggests his or her cousin’s company for the job, saying that the company recently designed a website for another big charity and it looks great. They know their prices are reasonable, too.

In Australia’s charity sector, just like in the business sector, related party transactions are common. A related party transaction is a transfer of resources, services or obligations between related parties. The transfer of money or financial payment is only one example. Other things could be transferred or provided by a related party such as goods, services, property, intellectual property, loans, guarantees, employees or volunteers. Accounting or legal services could be provided for free or at a substantially discounted fee.

For a small charity, a “related party” is defined as a person or organisation that is connected to the charity and has significant influence over it. For medium and large charities, a related party is defined in detail in the Australian Accounting Standards Board’s AASB 124 Related Party Disclosures.

Related party transactions are not necessarily a problem. However, they can give rise to conflicts of interest and may not be in a charity’s best interests. Therefore, it is important that those people running charities manage them responsibly.

Transparency and accountability are critical

ACNC Governance Standard 5, which reflects longstanding case law and other legislation, provides that people who lead charities cannot misuse their positions. They must take reasonable steps to disclose any actual or perceived conflict of interest and ensure financial affairs of the charity are managed responsibly. They have to act honestly and fairly in the best interests of the organisation and its mission — its charitable purpose. This is, no doubt, well known to AICD members as being part of the ethical behaviour that underpins the relationship of trust (fiduciary duty) that exists between directors and the organisations they govern.

But what is new for charities is that these related party requirements are being reinforced by new reporting rules. Many charities will already keep these records as part of good governance practices, but there is now a requirement to report them to us annually.

All charities will be required to report related party transactions in the 2023 annual information statement (AIS):

• For those that submit an AIS based on a financial year end, related party transactions from 1 July 2022 onwards need to be reported
•  For those that submit each calendar year end, related party transactions from 1 January 2023 need to be reported.

While the submission date for the 2023 AIS is well ahead of us, it is important that charities are keeping required records for the 2023 AIS period now. For those that report on a financial year basis, they would record these transactions from 1 July 2022.

Small charities — those with revenue below $500,000 — are not required to submit separate financial reports to us. However, all large and some medium charities are required to do so. Under the new rules, medium and large charities need to disclose related party transactions in their financial reports, in accordance with relevant Australian accounting standards.

Details that need to be recorded include the name and contact details of the related party, the nature of the relationship, a description of the transaction, the date and the amount of money paid (or the value of items or services provided) and the process for approving the transaction.

There are some variations on the rules. Basic religious charities (BRCs) are not required to answer financial questions in the AIS or submit financial reports. However, if a medium or large BRC chooses to submit a financial report, it must comply with the same requirements as other medium or large charities, including requirements to report related party transactions. If a charity is a public company registered with the Australian Securities and Investments Commission (ASIC), there may be additional requirements that apply under the Corporations Act 2001 (Cth). Ancillary fund guidelines prohibit certain related party transactions, so trustees of these charities must also follow those guidelines.

ACNC recommendations

To comply with the new rules we recommend directors ensure that:

• There is a policy for dealing with related party transactions and conflicts of interest. To reduce the risk of a conflict of interest arising, the policy should specify who should and who should not be involved in making decisions about transactions.
• There are procedures that set out how to put the policy into action.
• Good records are kept of any related party transactions such as invoices, receipts and bank statements. Minutes should record discussion and decisions about any related party transaction and how any resultant conflicts of interest are disclosed and managed.
• There is a register of interest. We have published a register template to serve as a guide. In the register, any potential conflicts of interest should be declared and described.
• When it is time for the charity to make a decision, such as the awarding of a contract, anyone with a conflict — whether it is actual or perceived — should declare their interest and stay out of the decision- making process.

Putting policy into practice

Of course, it’s not just about having a policy and procedures, it’s about following them and creating a culture of disclosure. So applying this to the scenario I initially mentioned, the CEO would declare his or her family relationship with the owner of the web design company they have suggested (as a potential conflict of interest). The charity’s leadership team would look to its conflict of interest and related party transaction policies to steer its approach. As set out in its procedures, the CEO is not involved in any decisions in the awarding of the contract. Leaders seek quotes from the company they have suggested as well as from other companies. They would award the contract to the company determined to be the one that delivers the best service at the best price to meet the organisation’s needs, in line with its charitable purpose. Records, receipts, contracts and minutes would be retained, and key details would be recorded in the charity’s conflict of interest register — and if the contract is awarded to the CEO’s family member, then also in the related party transaction register.

When it is time to lodge the 2023 AIS, the charity would submit details of this transaction. As it is a big charity, with annual revenue exceeding $3m, it would also provide details in its financial report.

The leadership team will have done its utmost to ensure its website is redeveloped by the company that offers the best service at the best price, to meet the organisation’s goals rather than the private interests of one of its leaders. They will have complied with the new rules and fulfilled their duty to be transparent and accountable.

On the other hand, if the contract is not awarded to the CEO’s family member, no related party transaction has occurred so there is nothing to disclose.