1 Compliance Issues for Charities Uniting Church of Australia Investment Conference 25 May 2006 John R Rappell Director

2 Background Emergence Consulting a specialised compliance firm. Our aim is to be part of the ongoing compliance management within pro-compliance organisations – particularly NFP, govt, financial sector. We like to develop compliance systems with sufficient feedback to be self-correcting and sustainable John Rappell 10 years in financial markets 10 years in industry policy, issues mgmt, govt advocacy 5 years in consulting

3 “HOW TO FIX THE NFP SECTOR” BRW Mar Set up a charities commission 2. Introduce new accounting standards to … recognise the three key business segments: producing funds, administering funds, spending funds 3. Amend the Corporations Act so that religious groups investment schemes are subject to full regulation 4. Force religious groups to pay tax on ventures outside charitable work 5. Introduce compulsory corporate governance guidelines for the NFP sector 6. Introduce laws that force companies to disclose their donations

4 AGENDA Compliance (LOL!) AS 3806 – 2006 (Zzzz!) NZ Charities Act 2005 Tax Rulings – open discussion Session finish

5 Compliance = Risk = Time Costs of a clean-up outweigh costs of compliance 20:1 Utah hospitals system legal framework: bare minimum, prescriptive, flawed, “last option”, opaque Benefits of a compliance culture moral framework: aspirational, seeking “best practice” Industry codes, good governance, codes of ethics & conduct, community expectations

6 Compliance: Systems Effective systems demonstrate effective management Feedback loop (ie early reporting), self-correcting Compliance Software usually a document diary with reporting and escalation Human systems integrated or arms length? Integrated into overall operations, not standalone, but independent; reporting lines Internal (depth) vs external (width) Australian AS (9 March 2006)

7 AS 3806 – 2006: Released 9 March 2006 Longer and more detailed than previous standard (1998) 12 principles with dot point explanations Very “linear” & one way Responsibilities to cut & paste to job descriptions: “Top management” Compliance manager Line manager employee Removed very useful Appendix A “Guidance for Small Business”  Useful Handbook HB no longer applicable 

8 AS 3806 – 2006: COMMITMENT Principle 1: Commitment by the governing body and top management to effective compliance that permeates the whole organisation Principle 2: Compliance Policy aligned to the organization’s strategy and business objectives, and is endorsed by the governing body Principle 3: Appropriate resources are allocated to develop, implement, maintain and improve the compliance plan Principle 4: The objectives and strategy of the compliance program are endorsed by the governing body and top mgmt Principle 5: Compliance objectives are identified and assessed

9 AS 3806 – 2006: IMPLEMENTATION Principle 6: Responsibility for compliant outcomes is clearly articulated & assigned (AS details minimum responsibilities) Principle 7: Competence and training needs are identified and addressed to enable employees to fulfil their compliance obligations Principle 8: Behaviours that create and support compliance are encouraged and behaviours that compromise compliance are not tolerated Principle 9: Controls are in place to manage the identified compliance obligations and achieve desired behaviours

10 AS 3806 – 2006: MONITORING & MEASUREMENT Principle 10: Performance of the compliance program is monitored, measured and reported Principle 11: The organisation is able to demonstrate its compliance program through both documentation and practice

11 AS 3806 – 2006: CONTINUAL IMPROVEMENT Principle 12: The compliance program is regularly reviewed and continually improved: Particularly through compliance program review (ie audits)

12 NZ CHARITIES ACT 2005 Charities Commission (1 July 2005) Promote public trust and confidence in charities will register charities starting mid 2006 (to keep tax exemption) on an entity or group basis Will assist charities to register & create a public access register will monitor charities & enforce registration requirements Annual returns incl reporting against charitable purposes educate & provide guidelines on good governance and mgmt (eg “Keep it Legal” Dec 05) Report to government & make recommendations

13 NZ CHARITIES ACT 2005 Common Law ‘Charitable Purpose’ Test A charitable organisation will have to have a purpose that either: advances education; advances religion; relieves poverty; or, Is otherwise beneficial to the community The charitable organisations objects must also be of benefit to the public. The benefit must be available to a large part of the community and must not result in the private benefit of an individual.

14 NZ CHARITIES Accounting NZ has established and is updating GAAP for NFPs under IFRS – due late 2006 NZ charities must also comply with Financial Reporting Act1993 if they are an issuer of securities (ie debentures)

15 ONE SOLUTION: Industry training & accreditation Concept of a Compliance Profession Develop an industry standard for charitable compliance management derived perhaps from 3806 Work with ACI? Provide uniform & consistent training Helps with recruitment Problem solving network with the same framework Include Anti-Money Laundering?

16 OPEN DISCUSSION Tax Rulings: TR 2005/21 Must be ITEC to access ASIC PS 87 (licensing & disclosure) TR 2005/21 Sets out the terms for being considered a charity incl: Charities operate for the public benefit Charitable purpose includes: relief of poverty; advancement of education; advancement of religion; and other purposes beneficial to the community including child care provided on a non-profit basis Charities can have incidental non-charitable purposes, but not independent non-charitable purposes Charities can undertake commercial, political, or recreational activities only in furtherance of their charitable purposes

17 OPEN DISCUSSION Tax Rulings: TR 2005/22 TR 2005/22 Released 20 December 2005, Commences 1 July 2006 Companies that are controlled by exempt entities aren't automatically exempt themselves Each entity must meet the exemption requirements Providing surpluses to an exempt associate doesn’t automatically meet the threshold Ss : “commercial enterprise” test: Dominant purpose test entities undertaking commercial activities with clients that are also carrying on charitable activities

18 Discussion

19 Thank you! John R Rappell Director, Emergence Consulting