Could unchecked spending in non-profits prompt stricter regulations?

Several months ago, we wrote about the need to balance growth, wealth and core values in a not-for-profit. Taking the temperature on public sentiment, it had become clear that scrutiny surrounding the use of public funding was intensifying – which in turn typically prompts an increase in formal government reviews. 

Last month we saw the results of such a review, with the release of the NSW Government’s review into Section 83C of the Education Act 1990 (NSW). 

The review’s purpose was to promote accountability and transparency in the use of public funds within private schools, addressing concerns about how these funds have been managed. It aimed to ensure that private schools adhere to regulatory standards aligned with their non-profit status, and to provide clearer guidelines and processes for compliance. 

Some of the key recommendations to come out of the review include:

• Replacing the current ‘for profit’ and non-compliant categories with a graduated scheme that better reflects the seriousness of breaches.
• Enhancing not-for-profit guidelines to provide more predictability for schools and non-profits on how regulations will be applied.
• Establishing clearer procedures for compliance and ‘show cause’ notices to ensure non-compliance issues are addressed quickly and fairly.

While these are still only recommendations at this stage, private schools should be able to see the writing on the wall regarding expectations for more transparency in how funding is allocated in the future. 

A possible signal for all non-profits

Private schools have generally operated with a significant degree of flexibility regarding their funding. While there are guidelines and regulations, the use of public funds operates mostly on a system of trust – where there is an unspoken agreement to dedicate educational funds appropriately. 

While media reports that claim certain schools operate to the contrary, it’s often largely irrelevant whether these claims are true or not. What matters is that public perception is changed, and this quite often leads to government intervention. 

We are seeing something similar play out in the NDIS space as well right now, with increased scrutiny and tighter controls due to reports of misuse and inefficiencies. In the past, we have seen leading non-profits like the Cancer Council face widespread criticism after the public learned that a large portion of fundraising expenses went towards marketing and administrative costs rather than cancer research and patient care. 

Public backlash leads to greater scrutiny, and the onus then falls on non-profits to provide a higher level of transparency to maintain their reputation and positive consumer perception. 

As these views persist, both non-profit schools and non-profits as a whole would benefit from reviewing their financial practices to ensure funds are being used effectively and in a way that aligns with their core mission and values. This is especially important for maintaining public trust and navigating potential regulatory changes.

A review is the best place to start

In the public view, allocation of funds should be very simple: every cent goes towards the cause for which the organisation stands for. 

However, in reality we know that business management is not so straightforward. There are overheads to pay, many of which have increased significantly in recent years. There are salary packages to offer, which must be competitive enough to attract candidates with the necessary skills and talent for specific roles.

There are also operational and investment costs, many of which are essential for maintaining services and longevity. The key lies in being able to substantiate every cent spent, and prove not only to others – but also to an organisation’s own executives – how that spend aligns with the mission and values. 

Often during a review, we uncover areas of spending that certainly do not align, which always become critical insights for the board and executive team of a non-profit. Making the unknown known allows for new efficiencies to be introduced so monies aren’t spent so haphazardly, or to take steps to re-align departments with the broader mission of the business. 

Reviews provide a wonderful starting point no matter where they lead, because it’s only through such a deep dive that you can get to the heart of where your organisation is succeeding and struggling. 

At RSM, reviews form a key part of what we do – be they in a financial, operational, compliance, risk, technology, cultural, or any other capacity. Ideally, these sorts of reviews should be leveraged beyond basic compliance requirements, or when times are tough or the organisation is under scrutiny. 

They need to be viewed as a vital tool in a board’s toolkit, that can be regularly called upon to verify that the non-profit is actively maintaining alignment with its own reason for being. The more you commit to this, the stronger you will be regardless of what unfolds in the future.  

FOR MORE INFORMATION

If you would like to learn more about the topics discussed in this article, please contact your local RSM office.