Boards must do more to stamp out wrongdoing that damages trust in charities

When you put $20 in the charity collector’s can at the traffic lights, you trust that it goes to the people the charity was set up to help. But how do you know if this is actually the case?

The vast majority of donations Australians make are on the spur of the moment, often triggered by emotional concern for a cause that is close to their hearts. There is little opportunity, inclination or sense for someone making a small donation to expend effort doing due diligence on the recipient.

So, what are some ways that charities cheat their donors? And what can be done about it?

Three mischiefs, and how they can be stopped

The most-common fundraising mischief that arises are bogus collectors – in person or via the phone or internet – who deceive donors using the cover of a well-known charity brand name. A federal government website shows 1,172 reports of this in 2016.

The cure for this is for donors to be alert, a register of the correct charity names and contact details to be made available, and regulators being ready to act swiftly on bogus collectors. The Australian Charities and Not-for-profits Commission provides an accessible register.

A less common but equally reprehensible mischief is where a charity’s officers or employees undeservedly profit from donations through excessive pay, perks or management fees.

There is a view that the ratios of money raised from the public to fundraising expenses or the like provide a simple, low-cost remedy to out such behaviour and even represent a measure of a charity’s efficiency and effectiveness.

This may seem a simple solution. But it works only in the most outrageous cases. Largely legal manipulation of accounting practices can easily hide such ratios from donors and even experienced investigators.

For example, Australian accounting standards do not provide a special template for charity reporting. Therefore, attribution of fundraising expenses can be distributed to general expenses, education and marketing categories. This is different from other OECD countries.

The reality that ratios don’t always work has now been acknowledged by those attempting to construct such league tables in North America and Europe. And research reveals few donors use such metrics in their donation decisions even when they are readily available.

To make matters worse, such unsophisticated league tables have contributed to placing pressures on charities subjected to scrutiny of the ratio of money raised to overhead costs. This has led some charities to craft their annual financial reports so they push the accounting boundaries and open themselves to media claims of deliberately deceptive reporting.

Research indicates that virtuous charities may enter a self-imposed “starvation cycle” of under-investment in staff and capital to minimise their overhead ratios, to conform to the vision of a “perfect” charity spurred on by media hype.

US charity rating agencies, practitioners and researchers are cautioning that focusing on overhead ratios without considering other critical dimensions of a charity’s financial and organisational performance can do more harm than good. In fact, many charities should spend more on overheads to ensure they have the capacity to deliver quality impacts and outcomes.

The final significant mischief is fraud or mismanagement. A formal independent audit is valuable. But this is reported up to six months or more after the event, which is too late.

Also, not-for-profit fraud surveys indicate that frauds are predominantly not discovered by external auditors reviewing the external financial accounts (between 2% and 7%). Most are exposed by internal controls and tips from employees, volunteers and other parties (35%).

Charity boards must lead

The burden falls on a charity’s board and senior management to prevent fraud and reassure their supporters and the public about their efforts.

The charity’s governing board is in the best place to monitor, judge and influence the organisation’s fundraising. So, regulatory strategies that focus on ensuring the board carries out this function appropriately are warranted.

No-one can match the board for closeness to the issues, timely access to information and the ability to apply swift corrective action in the most appropriate fashion. Boards have to be seen to be credible in their leadership of fundraising. This means they need to demonstrate that they honour the trust placed in them by donors to deal with their gifts in the most appropriate way.

Many charity boards should be required to make fundraising reflective of their charity’s strategic plan and overall mission. These goals should be internally measured on an appropriate mix of financial and non-financial measures, realistically and with a justified basis. This needs to be communicated to their donors and the public.

You can catch up on other pieces in our Charities in Australia series here.