Criminology Research Council grant ; (21/91)
Reports resulting from this project are listed below and were all published by the Program on Nonprofit Organisations, Queensland University of Technology. The National Safety Council Fraud - Regulatory Slip or Systemic Regulatory Failure? by Myles McGregor-Lowndes (364.1630994 fp McG); The Challenge from Within. Organizational Commitment in Voluntary Human Service Organizations, Working Paper No. 15 by Catherine McDonald (364.1630994 fp McD); Board Members' Involvement in Nonprofit Governance, Working Paper No. 16 by Catherine McDonald (364.1630994 fp McD); Gifts, The Law and Functional Rationalism, Working Paper No. 17 by Myles McGregor-Lowndes (364.1630994 fp McG); Community Services Development: A New Approach to Government / Non-Government Sector Relations, Working Paper No. 18 by Jan Williams (364.1630994 fp WIL); An Analysis of the Differences in Audit Processes used in the Audit of Nonprofit and Profit Organisations, Working Paper No. 19, by Renee Radich (364.1630994 fp RAD); and The Application of Financial Ratios in Analysing Nonprofit Organisations, Working Paper No. 20 by Ros Kent (364.1630994 fp KEN).
This project was initiated after the financial collapse of the Victorian National Safety Council, a nonprofit organisation, primarily due to fraud by its executive director. The project adopted a multi-disciplinary approach to identifying and assessing issues pertaining to fraud and its prevention in nonprofit organisations.
The first part of the project involved a case study of the financial collapse of the National Safety Council with material drawn from interviews, court proceedings and Corporate Affairs Commission documents. This study found that the fraud was facilitated by an inappropriate legislative regime for the particular organisation, unresponsive and uncoordinated scrutiny by regulatory officials and an inattentive board of management and auditors.
To follow up these results from the case study, three further studies were undertaken on Queensland nonprofit organisations. The first study sought to ascertain the current status and ability of nonprofit boards to fulfil their governance function. The results indicated that the management of boards generally lack appropriate formal qualifications, spend little time or effort on crucial management functions and rely heavily on executive management. The study went on to recommend prescriptive indications for maximising the governance capacity of nonprofit boards and organisations.
The second study involved an assessment of the audit process in nonprofit organisations compared to profit organisations. The research involved the collection of accounting information for 22 Queensland charities. The auditors of these organisations were requested to complete questionnaires addressing their overall approach to the audit of nonprofit organisations. For 11 of these nonprofit organisations, a matched (by annual revenue) profit organisation signed by the same auditor was compared using attributes of the audit process. Attributes tested were the use of engagement and management letters, materiality, components of audit risk, extent of compliance testing, staffing levels, and time spent. The results indicate that parts of the audit process used are statistically different for nonprofit and profit organisations. These differences should be taken into account by legislators in drafting of new legislation and by the auditing profession in evaluating audit risk.
The third study examined the use of financial ratios for nonprofit organisations which could be used as benchmarks as to financial performance. This would assist regulators in identifying financial patterns which require further investigation for possible fraud or financial trouble.
The study examined ratios of a group of nonprofit organisations and assessed the applicability of the traditional profit-based ratios to nonprofit organisations. Financial statements of a sample of charities registered in Queensland are analysed. The traditional profitability, liquidity and financial stability ratios were analysed and calculated wherever practicable and compared to the typical benchmarks used in profit analysis. The traditional ratios and their benchmarks (used in the profit sector) calculated from the financial statements prepared within the present reporting framework are largely inappropriate to the nonprofit sector. Alternative benchmarks useful for the nonprofit sector are suggested. In summary, the implications of this research are as follows.
Nonprofit organisations in Queensland currently appear to be poorly placed to manage increasingly complex management and accountability requirements.
The predictive models of high levels of involvement in board management processes indicate that if organisations wish to involve their boards, they must either engage in specific recruitment drives, or, instigate deliberate strategies aimed at gradually increasing and broadening board involvement.
State and Federal instrumentalities which make grants to nonprofit organisations for the delivery of welfare services need to seriously address the developmental and educative needs of nonprofit boards. This is particularly urgent if they continue to pursue policies which require service consumers and minority group members participation in nonprofit governance.
Auditors engaging in the financial scrutiny of nonprofit organisations behave towards nonprofits as if they are for-profit organisations. In effect, they fail to appreciate the differences in management engagement and capacity, thus leaving the organisations relatively exposed.
Some standard auditing practices and benchmarks do not reflect the conditions of nonprofit organisations, thus giving misleading results. The standard ratios used by the accounting profession to assess organisational viability are themselves quite limited in their capacity to reflect the true state of the nonprofit organisation.
The National Safety Council fraud is not a mere regulatory slip but evidence of the "worst case" result from systemically flawed legislation and regulatory environment. The cloning of certain business regulatory templates is inappropriate for the control of fraud and socially undesirable practices in nonprofit organisations.
In conclusion, the regulatory and management regimes and practices surrounding nonprofit organisation need to be adapted to their peculiar circumstances, particularly if they are to continue as a major medium for the delivery of social goods on behalf of the state and society.