The Australian Charities and Not-for-profits Commission (ACNC) has brought to light a significant governance issue in the non-profit sector: over-reliance on the organisation’s founders. This is a form of key person dependency where founders wield continual influence to the detriment of governance standards. In this comprehensive examination, we explore the ACNC’s review, its implications, and the risks associated with founders who retain key roles. We also consider how outsourcing crucial accounting functions can fortify an organisation’s governance structure and financial oversight, fostering sustainable operations that remain true to their charitable missions.
‘Key person dependency’ can create governance risks in organisations of any type or size. Reviews of the Australian NFP sector have noted a common pattern where a small charity’s dependence on its founders lacks balance and may pose risks. In these cases, the charity’s original founders still exert their influence on operations but do not uphold current governance standards, leaving the organisation exposed.
ACNC Commissioner Sue Woodward wrote in the February 2024 Commissioner’s Column, “While founders often bring passion and drive to their charities, an imbalance of power and influence within the governance structure can pose risks. This imbalance, often stemming from excessive trust placed in one individual, can erode a charity’s culture, hinder its operational effectiveness, and jeopardise its sustainability.”
The ACNC Reviews
The ACNC has been undertaking compliance reviews of charities which shine a light on common compliance issues. Funded by the Australian government since 2020–2021, the reviews focus on charities at risk of failing to meet their obligations under ACNC governance standards or external conduct standards.
Findings are published on the ACNC website and make valuable reading as they highlight issues that many charities struggle with, and offer insights on addressing them proactively through robust policies and procedures. The recent ACNC review ‘Risks to good governance where founders maintain key roles’ has identified potential issues for NFPs and measures that they could take to reduce risks by introducing “robust policies, procedures and processes to ensure good governance”.
Key findings on charities where founders maintain key roles
Instances where Australia’s charity founders maintain a substantial role beyond the charity’s initial phases are not unusual. Founders who continue to provide deep knowledge and a sound guiding hand make an important contribution to NFPs.
However, good governance often suffers when “founder’s syndrome” occurs and the founder maintains a “disproportionate power and influence over a charity and its board”, without formal processes. There is also a lack of guidance on, “what to do in circumstances where people – including founders – are not doing the right thing.”
The ACNC review noted these specific risks associated with charity founders maintaining key roles:
- the founder appointing friends and family to boards
- charity activities evolving over time and not being aligned to the registered charitable purpose
- poor financial management
- failure to have, or adhere to, decision-making policies and procedures
- lack of objective and independent decision-making
- failure to recognise and manage conflicts of interest and related party transactions
- remuneration paid to founders in paid positions lacked evidence of objective and independent decision-making
- failure to keep proper records.
There are ways for organisations to address problems related to founder dependency and the review reported that “In some cases, the founders themselves identified risks and took steps…”
How outsourced accounting is particularly suited to NFPs
Risks to good governance where founders maintain key roles related to financial management can be mitigated by stronger accounting procedures.
A charity that is serious about long-term sustainability and growth can draw on the expertise of an experienced outsourced accounting team to break the cycle of over-reliance on a founder.
The outsourced accounts service can provide a range of accounting functions that strengthen the organisation’s governance and processes, up to an on demand CEO service.
Scenarios raised by the ACNC review
Good accounting can play a critical role in your organisation’s move to greater transparency and avoiding the inherent risks of undue reliance on founders. Outsourced accountants can provide solutions to address the following examples of poor practice raised in the ACNC review.
• “Poor financial management practices, including a lack of independent and proper financial oversight, especially in the areas of charity income and expenditure.”
- An outsourced accounting team can provide impartial advice on income and expenditure. They also employ independent software that monitors expenditure in real-time and can automatically flag points of concern.
• “Substandard processes for proper tendering /or obtaining independent quotes for services, automatically awarding contracts to related parties.”
- Related party transactions may be hard to avoid in smaller organisations, but you can take a transparent and proactive approach to managing related party transactions. Risk mitigation policies are essential.
• “Decisions about contracts awarded to, or remuneration paid to, founders or their family members lack transparency”
• “Founders holding paid position not managed by independent persons”
- An outsourced accounts team can provide the independent body that supervises and manages both contracts and remuneration.
• “The founder is responsible for oversight of expenditure and not subject to review from persons who are independent and have relevant skills.”
- In most situations a professional accounting service will have more targeted skills in bookkeeping, payroll, tax and financial reporting than the founder, as well as current knowledge of accounting software, and is ideally placed to conduct an oversight of expenditure and regular reviews.
Outsourced accountants can contribute the independent, ethical and technically adept services that are essential for the future of NFPs that make a substantial contribution to the community. The input of professional accountants, combined with robust policies and procedures, can ensure your valued founders meet their compliance obligations effectively, and that the organisation is independent enough to endure and thrive.
