“Accountability” has become an important watchword in fundraising. The need for it has always been a legal requirement in fundraising, but what it meant and the public’s awareness of it have developed in recent years. Our next few columns will examine accountability and its meaning in the context of ethical fundraising.

The Broadbent Report recommendations and the follow-up by the Government of Canada and the Voluntary Sector in 1999 and 2000 are just some of the latest developments in accountability. The Canadian Centre for Philanthropy’s Ethical Fundraising and Financial Accountability Code also emphasized the importance of and the link between ethics, fundraising and financial accountability. The CCP’s Code advances the sector’s understanding of ethical fundraising and the standards that apply in fundraising. Similarly, the National Society for Fund-Raising Executives and other associations have made positive contributions towards ensuring that fundraising is both ethical and accountable.

But where are the standards for financial accountability?

Not surprisingly, there are different standards for different purposes. In Canada most are related in some fashion or other to the Canadian Institute for Chartered Accountants Handbook, which sets out the fundamental standards for financial accountability to be used by chartered accountants. These “generally accepted accounting principles” or GAAP, are not limited to the recommendations and materials set out in the Handbook, but for most purposes it provides sufficient direction.

Chartered accountants or public accountants are a critical component to accountability for charities and nonprofit organizations, if for no other reason than that they audit their financial statements. Most, if not all, charities are legally required to produce audited financial statements.

The auditor’s mantra

The auditor will conduct such examinations as he or she considers necessary to provide an audit opinion on whether or not the financial statements present fairly the financial position of the charity, the results of its operations and the changes in its financial position in accordance with generally accepted accounting principles.

What are these principles?

If you are a director or officer of a charity and are not familiar with such terms as “accrual accounting”, “accounting records”, “statement of financial position” or “statement of change in net assets” and what books of account need to be maintained, you are at risk. If you do not know whether or not the charity uses “restricted fund accounting method” or “deferral method” to deal with and to account for donations and grants, you need to find out more. There may be important external restrictions on the use of the donations or grants that directors need to take into account in preparing budgets, in approving expenditures and contracts and in making other decisions in managing the affairs of the charity.

If you do not know or understand the basics of financial accounting, there are certain risks that you run as a director or officer. They apply both personally and to the organization. Directors and officers owe duties to their organization. While nobody expects most directors or officers to have the experience and knowledge of a chartered accountant, there are legitimate expectations that they know, understand and take actions based upon the financial position of the charity.

Use financial statements in designing fundraising campaigns

The financial information set out in financial statements, for example, ought to be used by the board of directors in developing fundraising goals, identifying uses of proceeds and in designing fundraising campaigns. Ethical fundraising campaigns make the relevant financial information available to potential donors and granting bodies that must be able to rely upon the audited financial statements and other financial information when making their decisions.

When requesting a donation the charity will often provide financial information about the organization or about the proposed use of the donation. Granting bodies will usually require significant amounts of financial information about the organization, its current financial position and proposed uses of the grant before making a decision. Before authorizing a fundraising campaign or specific requests for donations or grant applications, the directors need to be satisfied that the information is accurate, complete and a fair presentation of their organization’s financial position.

Proper and timely reports a key to success

Financial statements and other financial information are often used in reporting to granting bodies and to regulatory agencies. It is common, for example, for a charity to sign an agreement with a government granting body that sets out what the grant will be used for and when and how the charity is to report. Inevitably, these reports require substantial amounts of financial information, often audited, and usually on the basis of GAAP. A failure to comply with the requirements may lead to the cancellation of the agreement and either the loss of the grant or even its repayment to the granting body.

Other regulatory agencies, such as the Public Guardian and Trustee in Ontario or the Canada Customs and Revenue Agency will also look to financial statements and records to provide certain assurances. Charities are accountable to these regulatory agencies for the use of funds and other assets. In the case of the CCRA, some charities think they are accountable only with respect to “receipted income”, i.e., the gifts for which receipts for income tax purposes were issued. However, CCRA has a right to all financial information and records and can use it to make determinations on eligibility for registration as a charity.

Others may also rely on or have a right to financial information. For example, the Members of a nonprofit organization usually have a right to financial information at the annual general meeting. The auditors must be able to review all of the financial books and records in order to provide their opinion and prepare the auditor’s report. The general public may also want to be able to review financial information for its own purposes. While its rights to the information is much less, directors and officers will want to ensure that the information provided is accurate and, in may cases, prepared in accordance with GAAP. The general public may not have rights to the information, but under the Charities Accounting Act they may complain to the Public Guardian and Trustee, who does have a right to the information.

Financial accountability underlies ethical fundraising

It permeates decisions, beginning with the reasons for a fundraising campaign, the proposed uses of the funds, in the information provided to potential donors and granting bodies and in reporting on the use of contributions. If anything, charities are moving or being pushed towards more accountability and greater transparency with the public in providing information and in being accountable for the use of donations and grants.

Don Bourgeois is an Ontario lawyer who has practiced in the charitable and nonprofit area of law and is an officer and director of several organizations. He is the author of The Law of Charitable and Non-Profit Organizations and The Law of Charitable and Casino Gaming, both published by Butterworths Canada. He can be reached by e-mail at don_bourgeois@hotmail.com.