Introduction
Australian charities operate under an unusually public disclosure regime. Every registered entity appears on the ACNC Charity Register, lodges an Annual Information Statement, and, above defined revenue thresholds, files audited financial statements any donor, funder or journalist may download. Recent sector reporting counts more than 60,000 registered charities with combined revenue approaching A$200 billion, almost half of it government funding, and records that nearly one in three charities spent more than it earned in the reporting year (Australian Charities and Not-for-profits Commission [ACNC] 2024). Deficits, in other words, are common; deficits accompanied by undisclosed related party payments are not.
This case study examines a hypothetical mid-sized charity, referred to here as the Charity, a company limited by guarantee providing disability and family support services across the Hunter region of New South Wales. The Charity reported revenue of A$6.24 million in 2024-25, which places it in the ACNC’s largest reporting tier despite being mid-sized in operational terms. The paper diagnoses the failure against the six ACNC Governance Standards, analyses the financial position through three worked ratios, locates the breakdown within a three lines of defence assurance model, and proposes a sequenced reform plan. Its argument is that the deficit was a symptom rather than the disease, becoming visible only when the conflict of interest failures that produced it exhausted the organisation’s cash.
Case Background
The Charity was incorporated in 1998 and employs 62 staff across three sites. Revenue derives from three streams: National Disability Insurance Scheme participant plans, grant funding from the New South Wales Department of Communities and Justice, and community donations and bequests. The board comprises eight directors elected by a membership of approximately 340 people, most of them families of service users. Directors are unremunerated. The founding chair, a locally prominent businessperson, has served continuously for fourteen years.
Three events during 2024-25 forced the issues into the open. The external auditor issued a management letter identifying the absence of a related party register and an inability to verify that a A$412,000 building refurbishment contract had been competitively procured. The chief financial officer resigned after eleven weeks, citing an inability to obtain board approval for a revised budget. A member then lodged a concern with the ACNC alleging that the chair’s private consultancy had been paid without tender.
Investigation confirmed the substance of each allegation. During 2024-25 the organisation paid A$96,000 to a consultancy controlled by the chair for unspecified strategic advice, A$142,000 in progress payments to a building firm owned by the spouse of another director, and A$58,000 to an information technology contractor who is a relative of the chief executive. Combined payments to responsible persons and their associates totalled A$296,000, or 4.4 per cent of total expenditure, against A$110,000 in the previous year. None was disclosed in the 2023-24 financial statements, none was minuted with a recusal, and none was tested against a competitive quote.
Governance Diagnosis Against the ACNC Governance Standards
The six Governance Standards are outcome based rather than prescriptive: they state what a charity must achieve, not the procedures it must adopt (ACNC 2023). That drafting choice matters here, because the Charity satisfied several formal requirements while breaching the standards they were meant to serve.
Standard 5: duties of responsible persons
Standard 5 requires responsible persons to act with reasonable care and diligence, to act honestly in the charity’s best interests and for its charitable purposes, not to misuse their position, to disclose actual or perceived material conflicts of interest, to manage the charity’s financial affairs responsibly, and not to allow the charity to operate while insolvent (ACNC 2023). The Charity’s failures cluster almost entirely under this standard.
The conflicts limb was breached most directly. A perceived conflict is sufficient to trigger the disclosure duty, so the chair’s obligation arose the moment his consultancy was considered, regardless of whether the fee was at market rate. The board minutes record no declaration and no recusal. The financial management limb was breached in a subtler way: the board received a single page of year to date figures at each meeting, with no forecast, no cash position and no comparison against budget. Directors could not have identified a deteriorating result from what they were given, itself a failure of diligence, since the duty extends to insisting on adequate information, not merely reading what is supplied (Australian Institute of Company Directors [AICD] 2024).
Standards 3 and 4: Australian law and suitability of responsible persons
Standard 3 obliges a charity not to commit a serious offence or breach a law attracting a civil penalty of 60 penalty units or more. Standard 4 requires reasonable steps to satisfy the charity that its responsible persons are not disqualified. The Charity took no such steps beyond an informal reference from a serving director, and conducted no annual eligibility declaration. Where a board recruits through the personal networks of incumbents, the suitability check and the conflict of interest risk share the same root cause.
Standards 1, 2 and 6: purpose, accountability and public trust
Standard 1 requires the charity to pursue and demonstrate its not-for-profit purposes; Standard 2 requires accountability to members; Standard 6 requires charities working with children to comply with the National Principles for Child Safe Organisations. The Charity’s annual general meeting presented summary figures only, and members were not told that the auditor had issued a management letter. Cornforth (2012) argues that nonprofit governance research overemphasises board structure at the expense of the information flows that determine whether a board can hold management to account. The Charity illustrates the point: the constitution, committees and meeting cycle were all in order, while the accountability they were meant to deliver was absent.
Board Composition and Capability
Table 1 sets out the board skills matrix reconstructed from director declarations and meeting records for 2024-25.
Table 1: Board composition, attendance and skills matrix, the case charity, 2024-25
| Director | Board role | Tenure (years) | Meetings attended | Finance and accounting | Risk and compliance | Legal | Sector and service expertise | Free of related party interest |
|---|---|---|---|---|---|---|---|---|
| A | Chair | 14.0 | 9 of 10 | Partial | No | No | Yes | No |
| B | Deputy Chair | 11.0 | 7 of 10 | No | No | No | Yes | Yes |
| C | Treasurer | 9.0 | 10 of 10 | Yes | Partial | No | No | Yes |
| D | Director | 12.0 | 5 of 10 | No | No | No | Yes | No |
| E | Director | 8.0 | 6 of 10 | No | No | Yes | Partial | Yes |
| F | Director | 3.0 | 10 of 10 | Partial | Yes | No | Yes | Yes |
| G | Director | 7.0 | 4 of 10 | No | No | No | Yes | Yes |
| H | Director (casual vacancy, February 2025) | 0.4 | 3 of 4 | Yes | Yes | No | No | Yes |
Three quantities in Table 1 carry the diagnosis. Mean tenure is 64.4 divided by 8, or 8.1 years, with four directors beyond ten years, a duration at which the ASX Corporate Governance Council (2019) advises boards to assess whether independence of judgement has been compromised. Attendance was 54 of a possible 74 director meetings, or 73.0 per cent, and two directors attended half or fewer. Substantive financial capability rested with two of eight directors, or 25.0 per cent, one of whom joined four months before year end; the same proportion held risk and compliance expertise. The board was rich in lived service knowledge and poor in the disciplines required to interrogate a A$6.24 million operation.
The composition also explains the conflict failures without recourse to bad faith: long tenure, recruitment through personal networks and a shared local business community produce a board in which challenging the chair is a social act before it is a governance one.
Financial Position and Worked Analysis
Table 2 presents the summarised financial results for the two most recent years.
Table 2: Summarised statement of profit or loss and selected balance sheet items (A$), 2023-24 and 2024-25
| Item | 2023-24 | 2024-25 | Movement |
|---|---|---|---|
| Government grants and NDIS revenue | 4,410,000 | 4,120,000 | (290,000) |
| Donations and bequests | 1,015,000 | 865,000 | (150,000) |
| Fee for service income | 640,000 | 980,000 | 340,000 |
| Investment and other income | 245,000 | 275,000 | 30,000 |
| Total revenue | 6,310,000 | 6,240,000 | (70,000) |
| Program employee benefits | 3,780,000 | 4,020,000 | 240,000 |
| Other direct program costs | 900,000 | 985,000 | 85,000 |
| Administration and support employee benefits | 610,000 | 820,000 | 210,000 |
| Other administration and governance costs | 280,000 | 420,000 | 140,000 |
| Fundraising costs | 580,000 | 355,000 | (225,000) |
| Depreciation and amortisation | 120,000 | 125,000 | 5,000 |
| Total expenditure | 6,270,000 | 6,725,000 | 455,000 |
| Surplus / (deficit) | 40,000 | (485,000) | (525,000) |
| Cash and cash equivalents | 1,690,000 | 1,145,000 | (545,000) |
| Unexpended grant liabilities | 510,000 | 520,000 | 10,000 |
| Free (unrestricted) reserves | 1,180,000 | 625,000 | (555,000) |
| Net assets | 2,049,000 | 1,564,000 | (485,000) |
| Payments to responsible persons and associates | 110,000 | 296,000 | 186,000 |
Administration cost ratio
The administration cost ratio expresses non-program overhead as a proportion of what the charity spends:
Administration cost ratio = (administration and governance expenditure ÷ total expenditure) × 100
2024-25 = (820,000 + 420,000) ÷ 6,725,000 × 100 = 1,240,000 ÷ 6,725,000 × 100 = 18.4 per cent
2023-24 = (610,000 + 280,000) ÷ 6,270,000 × 100 = 890,000 ÷ 6,270,000 × 100 = 14.2 per cent
A 4.2 percentage point deterioration in one year is substantial, and roughly half of the increase is attributable to the related party payments recorded in Table 2. The ratio must nonetheless be read with caution. Substituting revenue as the denominator gives 1,240,000 divided by 6,240,000, or 19.9 per cent, and treating fundraising as overhead gives 1,595,000 divided by 6,725,000, or 23.7 per cent. Three defensible definitions produce answers spanning 5.3 percentage points, which is why the sector regulator declines to publish a benchmark and why a board should watch the trend rather than the level (ACNC 2024; Productivity Commission 2024).
Deficit as a proportion of revenue
Deficit ratio = (deficit ÷ total revenue) × 100 = 485,000 ÷ 6,240,000 × 100 = 7.8 per cent
The prior year returned a surplus of 40,000 divided by 6,310,000, or 0.6 per cent, so the year on year swing equals 525,000 divided by 6,240,000, or 8.4 per cent of revenue. A deficit of this scale is not a rounding error absorbed by a difficult trading year; it consumed 41.1 per cent of the organisation’s opening free reserves of A$1,180,000 in twelve months.
Reserves expressed in months of operating expenditure
Reserves adequacy is best expressed as the number of months of operating expenditure that unrestricted funds would cover. Depreciation is excluded because it consumes no cash:
Average monthly operating expenditure = (total expenditure – depreciation) ÷ 12 = (6,725,000 – 125,000) ÷ 12 = 6,600,000 ÷ 12 = A$550,000
Reserves cover = free reserves ÷ average monthly operating expenditure = 625,000 ÷ 550,000 = 1.14 months
The comparative calculation for 2023-24 is (6,270,000 – 120,000) divided by 12, giving A$512,500, and 1,180,000 divided by 512,500, giving 2.30 months. Cover therefore halved in a single year. Against a widely applied minimum target of three months, the shortfall is:
Shortfall = (3 × 550,000) – 625,000 = 1,650,000 – 625,000 = A$1,025,000
Continuing at the current rate of loss, unrestricted reserves would be exhausted in 625,000 divided by 485,000, or 1.29 years, roughly fifteen months. This calculation, not the deficit itself, is what converts a financial result into a director’s duty question, because Standard 5 prohibits responsible persons from allowing a charity to operate while insolvent.
One accounting matter compounds the position. A A$520,000 grant carrying sufficiently specific performance obligations was recognised as income on receipt in 2023-24 rather than deferred as a contract liability. Such grants should be recognised as the obligations are satisfied under AASB 15, with AASB 1058 applying only where no sufficiently specific obligation exists (Australian Accounting Standards Board [AASB] 2023). Correct treatment would have turned the reported 2023-24 surplus into a deficit, meaning the board had already presided over two consecutive loss years without knowing it.
The Assurance Gap
The Charity’s control weaknesses are best understood as a structural gap rather than a series of individual lapses. The three lines model distinguishes the operational management that owns risk, the finance, risk and compliance functions that oversee it, and independent internal audit, all reporting to a governing body that is itself accountable to external assurance providers and regulators (Institute of Internal Auditors [IIA] 2020). Figure 1 applies that model to a charity of this scale.
Two failures follow from Figure 1. The second line existed on the organisation chart but reported to the chief executive, so a finance manager who questioned a related party invoice was questioning her own supervisor. The dashed lines failed as well: the auditor’s management letter reached management and was never tabled, precisely the pathway a functioning audit committee is designed to protect. A charity of this size cannot afford standing internal audit, but it can commission a rotating review of one control area each year, the proportionate substitute the model contemplates.
Reform Plan
Table 3 sets out the remediation program agreed by the reconstituted board, sequenced so that the controls preventing recurrence precede the measures restoring solvency.
Table 3: Governance reform plan: action, obligation addressed, owner, timeframe and success measure
| No. | Action | Obligation addressed | Owner | Timeframe | Success measure |
|---|---|---|---|---|---|
| 1 | Adopt a conflicts of interest policy with a standing register, declaration as a first agenda item, and mandatory recusal from discussion and vote | Governance Standard 5 | Acting Chair and Company Secretary | 0-1 month | Register tabled at every meeting; all eight directors lodge annual declarations |
| 2 | Notify the ACNC of the suspected significant contravention and the remediation program | ACNC Act 2012 (Cth), notification obligations | Acting Chair | 0-1 month | Written acknowledgement received and recorded |
| 3 | Suspend and independently review all related party contracts; retender the refurbishment works with three written quotes | Governance Standard 5; AASB 124 | Audit and Risk Committee | 0-3 months | Independent probity report; all contracts above A$50,000 competitively tendered |
| 4 | Constitute an Audit and Risk Committee with an independent chair, an approved charter and a direct line to the external auditor | Governance Standard 5 | Board | 1-3 months | Committee meets quarterly; management letter tabled in full |
| 5 | Introduce a delegations schedule, monthly cash reporting and quarterly forecasts against budget | Governance Standard 5, responsible financial management | Chief Executive | 1-3 months | Board papers include cash, forecast and covenant position each month |
| 6 | Restate 2023-24 grant income under AASB 15 and AASB 1058 and correct the comparatives | ACNC Act 2012 (Cth) reporting; AASB 15 and AASB 1058 | Chief Financial Officer with external auditor | 0-4 months, before the 2025 statement is lodged | Unqualified audit opinion; corrected Annual Information Statement |
| 7 | Refresh the board: retire two directors beyond ten years’ tenure and recruit for financial and risk capability through open advertisement | Governance Standards 2 and 4 | Nominations Committee, ratified by members | 3-6 months | Financial capability from 25 to at least 50 per cent; mean tenure below six years |
| 8 | Adopt a reserves policy and a costed deficit reduction plan closing the A$1,025,000 gap | Governance Standard 5, insolvency limb | Chief Executive and Treasurer | 6-24 months | Reserves cover of 3.0 months by 30 June 2027 |
The sequencing carries an argument. Actions 1 to 4 cost almost nothing and can be completed within a quarter, whereas action 8 requires two years of disciplined trading. Boards in difficulty frequently invert this order, pursuing the financial recovery that reassures funders while deferring the control reforms that caused the problem.
Director Duties and Reporting Obligations
Because the Charity is a company limited by guarantee registered with the ACNC, its obligations sit across two statutes. Regulatory relief switches off much of the Corporations Act reporting regime and several civil duty provisions for registered charities, on the basis that the ACNC Governance Standards address the same ground (Australian Securities and Investments Commission [ASIC] 2016). Two consequences are frequently misunderstood by volunteer directors. First, the relief does not extend to the criminal provisions dealing with dishonest or reckless conduct, nor to the insolvent trading provisions of the Corporations Act 2001 (Cth), which continue to apply with personal liability attached. Second, breach of a Governance Standard is enforced administratively rather than through the courts: the ACNC may issue a warning or direction, accept an enforceable undertaking, suspend or remove a responsible person, or revoke registration, and revocation would cost the Charity both its deductible gift recipient endorsement and its charity tax concessions.
Reporting obligations follow from size. As a large registered charity, it must lodge an Annual Information Statement and an audited financial report within six months of year end, and must report key management personnel remuneration where two or more such personnel are employed. Related party transactions must now be disclosed in the annual financial report of every medium and large charity in accordance with the applicable standard, which requires disclosure of the nature of the relationship, the amounts involved and any outstanding balances, whether or not the transaction was at arm’s length (AASB 2022; ACNC 2025). The Charity’s non-disclosure was therefore a reporting breach in its own right, quite apart from the governance failure it concealed.
Transparency is itself a control. Because these disclosures appear on the public Charity Register, a proper related party note would have exposed the chair’s consultancy to members, funders and the New South Wales department well before the auditor intervened. Cortis et al. (2016) note that Australian charities of this scale depend disproportionately on a small number of government contracts, which makes reputational damage an existential rather than a presentational risk.
Conclusion
The Charity did not fail because its market deteriorated. Revenue moved by 1.1 per cent, while expenditure rose 7.3 per cent and the result swung by 8.4 per cent of revenue. The administration cost ratio rose from 14.2 to 18.4 per cent, reserves cover halved from 2.30 to 1.14 months, and A$296,000 flowed to responsible persons and their associates without disclosure, tender or recusal. Each figure points to the same conclusion: an unchallenged, long tenured board, without financial capability or an independent assurance line, could neither detect nor prevent the conduct that produced the deficit.
The case also demonstrates why the ACNC Governance Standards are drafted as outcomes. The Charity held ten meetings, elected a treasurer, appointed an auditor and lodged its statements on time, and complied with none of the standards that mattered. For Australian charity boards the practical lesson is that governance is evidenced by the quality of the information a board demands and the discipline with which it manages its own conflicts, not by the existence of the structures through which those things are supposed to happen.
References
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