Accounts and auditing

Some associations might operate on a small budget, while others manage budgets of millions of dollars.  An association may derive its funds from a number of sources, including government subsidies, sponsorships, donations, fundraising activities and membership fees. This chapter outlines what the Act requires in terms of accounting and auditing procedures. 

Key Points

  • An incorporated association must keep accurate and up-to-date financial records.
  • An incorporated association must present the financial statements to the members at each Annual General Meeting.
  • Financial reporting requirements are based on a three tiered system with responsibilities increasing based on an incorporated association's annual revenue.
  • Not all incorporated associations are required to audit their financial statements. However this is advisable as it makes for responsible financial management. Moreover, some funding bodies may require financial statements to be audited.

Accounting requirements

There are two things all incorporated associations must do to comply with the accounting requirements of the Act:

  • keep true and accurate accounting records that explain the financial transactions and the financial position of the association in a manner that can be conveniently and properly audited; and
  • submit accounts to the members at each Annual General Meeting. 

Taxation and industrial legislation may also require financial records to be kept.  In addition to these legal obligations, an association's management committee needs clear, accurate and up-to-date financial information to ensure the association is viable and operating efficiently. 

Procedures for keeping accurate accounts

How an association organises its accounts, payments and record keeping is up to the members (or more probably, the committee) and can vary depending upon the size and complexity of the association's financial situation. If your association is small, you may only wish to have a voluntary treasurer who 'keeps the books'. Alternatively, if the association requires more on-going, skilled accounting services, the association could employ its own in-house finance staff, or out-source the tasks to an accountant or book-keeper.

Written records will generally involve the use of cash payment books to record amounts the association pays, cash receipt books to record amounts received, GST tax invoices and tax records, salary records, bank reconciliation statements and other relevant financial documents.

Good financial practices

As a minimum, associations wanting to embrace good financial practices should give attention to developing policies and procedures in the following areas:

  • preparing an annual budget of expected income and allocated expenditure;
  • recording income received, including source, date and amount. Examples include grants, membership, donations, fundraising, sales of goods and interest;
  • developing a system to accurately, but speedily, record and pay necessary bills, including authorisation clearances and issuing invoices;
  • recording and authorising petty cash transactions;
  • where necessary, recording Australian taxation information, such as goods and services tax, superannuation, fringe benefits, income tax records and withholding payments;
  • where necessary, recording salary and leave payments, and reimbursements to employees. Time and wages records must be kept in accordance with the relevant award or industrial law;
  • undertaking bank reconciliations (i.e. checking association records against bank records);
  • recording expenditure against key area items. These areas are usually aligned to budget items (e.g. $200 for a newsletter against an annual association budget of $5000);
  • maintaining an up-to-date register of association assets; and
  • maintaining an effective and secure filing system for insurance policies, leases, contracts and funding agreements.

If the association has a significant turnover, an essential tool for the management committee is the monthly or quarterly cash flow statement. This will enable the management committee to ensure that the association is solvent – that is, it is able to pay its debts as and when they fall due.

Members' right to the financial accounts

The Act requires that association’s annual financial statements (or annual accounts) be presented to the members at each AGM. 

Members should have the opportunity to examine these accounts if they wish. Ideally, each member would receive a copy of the accounts, which could be  included in the association’s annual report (if applicable).  Where this is not feasible, time must be allocated for the treasurer or other committee member to present a summary of the accounts and explain the major items. 

This requirement of the Act does not give members any rights to view the financial records of the association, nor any of the accounts or statements that may be prepared for the committee during the year.  However, it is open to the association to make provision in the rules for access to these records or accounts if that is the wish of the members.

If, for any reason the annual accounts are to be audited, the audit report must form part of the statements presented to the members.  Some associations will invite the auditor to attend the AGM so that he or she can respond to enquiries from members.

Tiered financial reporting

Under the Act the financial reporting responsibilities of an incorporated association will depend on the tier that it falls into.  The tiered reporting system is intended to minimise the reporting burden for small associations while ensuring that larger associations are accountable for the significant resources they control.

Which tier applies to the association?

The tier an association falls under is based on its annual revenue.  The annual revenue is calculated based on the total amount of money received through the association’s activities during a financial year.

The tiers are set as follows:

Tier 1: less than $250,000 in revenue.
Tier 2: $250,000 to $1,000,000 in revenue.
Tier 3: over $1,000,000 in revenue.

Calculating revenue

Revenue is calculated in accordance with the Australian Accounting Standards and is the income that arises in the course of the ordinary activities of an incorporated association before any allowance is made for any relevant tax liabilities.

The following examples are likely to be revenue if they relate to the association’s ordinary activities:

  • fees and charges for provision of services;
  • interest earned;
  • government and other grants, donations, bequests, sales of goods and inflows from other fundraising activities.

The following is not included in the calculation of revenue:

  • gains from the sale of non-current assets (asset which is not easily convertible to cash and is not expected to become cash within the next year) eg club property;
  • unrealised gains (profit which has been made but not get realised through a transaction) eg revaluation of inventory or club property; and
  • amounts collected on behalf of third parties.

In the situation where an association has a one off increase in revenue such as the association applying for a special grant or fundraising for a particular purpose in addition to its usual activities.  It can apply to the Commissioner to be declared as a specific tier for that particular financial year.

This application must be made in writing no later than three months after the end of the financial year and should include details of the:

  • revenue for the previous financial year;
  • revenue for the current financial year;
  • one-off event that cause the revenue increase; and
  • projected revenue for the next financial year (for example a budget forecast).

The application will only be granted if the Commissioner is satisfied that the change in revenue is the result of unusual or non-recurring circumstances. 

Requirements for a Tier 1 association

To understand the reporting requirements of a Tier 1 association, the group must first establish whether it is operating on a cash or accrual basis of accounting.

Under cash accounting the income is recorded when it is received and the expenses when they are paid.

An association using accrual accounting will record the income the date it is earned (irrespective of whether the payment is actually received on that date) and the expenses when they are incurred. 

Accrual accounting is more common in organisations that deliver services in return for payment or receive grants to complete particular projects.

An association operating on a cash basis must prepare a financial statement that includes a:

  • statement of all the monies received and paid during the financial year;
  • reconciled statement of all bank account balances as at the end of the financial year; and
  • statement detailing the association’s total assets and liabilities as at the end of the financial year.

An association operating on an accrual basis must prepare a financial statement that may include:

  • statement of the income and expenditure for the financial year; and
  • balance sheet.

Auditing requirements for Tier 1 associations

A tier 1 association is not required to complete an audit or review of its accounts unless:

  • it is a requirement of the association’s rules that one be completed;
  • it is a requirement under the terms of the association’s funding agreement or licence;
  • the majority of members at a general meeting pass a resolution that an audit will be completed; or
  • the association is directed to do so by the Commissioner.

Requirements for a Tier 2 association

A Tier 2 association is required to prepare an annual report that complies with Australian Accounting Standards and contains all of the following:

  • the financial statements for the year;
  • the notes to the financial statements including all disclosures required by the accounting standards and information required to give a true and fair view of the financial position; and
  • the management committee’s declaration.

The Management Committee Declaration

The association’s committee must pass a resolution declaring whether:

  • there are reasonable grounds to believe that the association will be able to pay its debts when they become due and payable; and
  • the financial statements and notes have been prepared in accordance with the requirements of the Act.

The declaration included in the financial report must specify the date of the committee’s declaration and be signed by at least 2 committee members authorised by the management committee.

Review requirements for Tier 2 associations

All Tier 2 associations must have their financial reports reviewed.  The process of reviewing an association’s accounts is not as detailed as the process of completing an audit.  A reviewer will look over the association’s financial report and provide a statement whether anything has come to their attention which might suggest that the association’s report does not comply with the requirements of the Act.

In comparison, an auditor must collect evidence relating to the association’s financial records and transactions to satisfy themselves that the report is a true and correct reflection of the association’s finances.  This enables them to provide a formal opinion whether the accounts meet the relevant legal requirements.

A review may be conducted by:

  • a registered company auditor;
  • an audit firm; or
  • a current member of a relevant professional body such as the Institute of Chartered Accountants, the National Institute of Accountants or CPA Australia.

Before the appointed reviewer begins they must provide the committee with a written independence declaration and ensure their review is conducted in accordance with Australian Auditing Standards.

The reviewer’s report must include a statement whether they identified anything to suggest that the financial statements or report did not comply with the requirements of the Act.  If the reviewer believes that the financial statements or report do not meet the requirements of the Act, they must describe the matters and explain why they do not comply.

The reviewer is also required to write to the Commissioner advising of any suspected breaches of the requirements of the Act within 28 days of identification.

All Tier 2 associations are required to include a copy of the reviewer’s report with the financial report presented to members at each annual general meeting.

Auditing requirements for Tier 2 associations

The Act only requires a Tier 2 association to audit its financial report if:

  • the majority of members at a general meeting pass a resolution that an audit will be completed; or
  • the association is directed to do so by the Commissioner.

However if the association is required to report on its financial activities to another organisation such as funding bodies or licensing authorities, it should confirm with the organisations whether a reviewers report will satisfy these reporting requirements or whether an audit is required.

Requirements for a Tier 3 association

Tier 3 associations must prepare an annual financial report that complies with Australian Accounting Standards and includes the:

  • financial statements for the year;
  • notes to the financial statements; and
  • management committee’s declaration.

Unlike the other tiers, the Act requires all Tier 3 associations to ensure that their annual financial report is audited and a copy of the audit report is presented to the members at each annual general meeting.

Again the auditor must provide the committee with an independent declaration prior to commencing work on the audit.  The auditor must prepare a report which:

  • includes a statement whether, in their opinion the financial statements or report have been prepared in accordance with the Act.  If they are not of this opinion they must explain why.
  • describes any defects or irregularities identified in the financial statements or report;
  • includes any statements or disclosures required by the auditing standards; and
  • specifies the date the report was prepared.

If the auditor identifies any matters that they suspect breach the Act this information must be reported to Consumer Protection within 28 days of identification.

Auditing accounts

The Act does not require all incorporated associations to audit or review their accounts. An association may still require an audit to be carried out and this requisite would normally be specified in the rules. It is within the power of the members to pass a resolution that the accounts for a particular financial year be audited, especially if they had any reason to be concerned. Funding body agreements might also require the association's accounts to be audited to ensure that the funds provided are used according to the funding agreement and for the purpose stated in the agreement.

Reasons for auditing

Although it may seem like additional time, effort and expense to have an annual audit. There are a number of reasons why an association (or a funding body) would require records to be audited:

  • an audit of the financial records of the association ensures greater accountability to the members (and for some associations, the public);
  • the audit gives assurance that all funds received by the organisation have been correctly collected, documented and banked. It shows all monies spent by the organisation were for the purpose of the association, approved by the management committee, and documented. This also helps to protect management committee members against unfounded allegations of misconduct;
  • the audit provides an account of the assets of the association and verifies that records and registers are properly maintained;
  • the audit functions as a check and balance. It requires that the financial statements of the association be kept to a standard in order for the audit to occur and will indicate areas that may require improvement;
  • audited financial statements are required if the association has charitable status; and
  • funding bodies often require audited financial statements.

The role of the auditor

The purpose of an audit is to enable an auditor to express a professional and independent opinion on the financial statements of the association. It is the responsibility of the management committee to provide the financial statements.

It is not the task of the auditor to find all errors or fraud, therefore the management committee cannot rely on the auditor's work as a substitute for the performance of their own duties. Every member of the committee must pay close attention to the association’s financial statements at all times.

The auditor will, on the basis of the financial statements take reasonable steps to ensure that the:

  • accounting records of the association are adequate to prepare the financial statements;
  • financial statements are reliable;
  • results for the period are demonstrated in the financial statements; and
  • association's state of affairs for the period are disclosed.

The auditor's task is to provide a professional opinion on the state of the financial affairs of the association. Auditors have a legal responsibility for their opinion and can be held liable for negligence if the audit is not completed according to professional standards, or for damage to the association as a result of negligence.

Appointing an auditor

When appointing an auditor, a good place to start is by word of mouth – simply asking other associations whom they use. If using a professional auditor check their registration status. Accountants who are members of the Institute of Chartered Accountants, the National Institute of Accountants or the Australian Society of Certified Practising Accountants are required to meet the auditing standards set out by these professional bodies.

The management committee may appoint the auditor or reviewer required to meet the reporting requirements of Tier 2 and Tier 3 associations. The auditor or reviewer will remain in office until their report has been presented for consideration at the annual general meeting (or they resign).

If the association is required to appoint an auditor or reviewer for any other purpose such as at the request of the members, a resolution must be passed by the members at a general meeting. The appointed auditor or reviewer will then remain in office unless they:

  • resign;
  • are removed from office;
  • cease to be qualified to conduct audits or reviews;
  • die; or
  • become an insolvent under administration.

When the reviewer or auditor has been appointed ask for a letter of engagement from the person setting out:

  • what their responsibilities are;
  • what they will require to undertake the task (ie ask them to list what they require);
  • what it will cost; and
  • what the expected time frame is for completion.

This ensures that there is a clear understanding of the duties and responsibilities of the auditor.

To deal with any problem, ensure the auditor has the contact details of the treasurer and at least one other committee member in case the treasurer can't be contacted, someone else can.

Although the treasurer usually has responsibility for overseeing the financial statements, this is not their responsibility alone. Whilst the treasurer should be able to provide the auditor with additional financial information if required, the responsibility can be shared among other members.

To avoid a potential conflict of interest, appoint an auditor who is independent of the association. Do not appoint an auditor for the association who is:

  • a past or present member of the management committee;
  • a member of the association;
  • an employee, supplier of goods or services or a servant of the association; or
  • an employer, partner or family member of a member of the association’s management committee.

Resignation of an auditor or reviewer

An appointed auditor or reviewer may resign at any time by giving written notice to the association. If this occurs the association must lodge notification with Consumer Protection within 14 days.

Removing an appointed auditor or reviewer

To remove an appointed auditor requires members to pass a resolution at a general meeting of the association. The Act requires written notice of the intention to move such a motion to be given to all members at least two months before the meeting is held.

It is also a requirement that the committee send a copy of the notice to the auditor or reviewer and the Commissioner for Consumer Protection.

Once the notice has been received the auditor or reviewer has 30 days to make a written submission to the committee. If such a submission is received the committee must:

  • give a copy to all members at least seven days before the meeting; and
  • allow the auditor or reviewer to attend the general meeting and speak to the members prior to any vote taking place.

If the association does not complete the above actions the resolution to remove the auditor or reviewer will have no effect.

Rights of the auditor/reviewer

Under the Act an appointed auditor or reviewer is entitled to:

  • receive all notices and communications that are sent to members regarding general meetings of the association;
  • attend any general meeting of the association; and
  • be heard at any general meeting they attend where the business being discussed relates to their functions as the auditor or reviewer.

It is the responsibility of the association’s committee to ensure that the above rights are afforded to the auditor/reviewer. There are penalties under the Act for failing to do so.

Disclosure

The association is required to provide all the financial records of the association to the auditor.  All records should be complete.

Auditing practice identifies any material that is omitted or not disclosed as a misstatement if it would have influenced the auditor’s judgement.

What if the audit report is unsatisfactory?

There is always the possibility an auditor may present an unfavourable report identifying areas that the association needs to address.

If the association is not clear about what the auditor is saying, it should ask for further written clarification.  In presenting the audit report and findings to the AGM, the management committee should report on the auditor's recommendations and what action has been undertaken to address areas of concern.  To ignore an auditor's report is likely to place the association at risk and increase the exposure of individuals (particularly, the committee) to personal liability.

There may be irregularities in the financial statements of the association due to a number of factors, such as:

  • a lack of understanding in preparing financial statements;
  • a lack of understanding in assessing financial statements;
  • poor controls over money in and out; or
  • dishonesty.

If problems suggesting dishonesty are found in the financial records, the association should obtain prompt legal advice and attend to any immediate matters such as freezing accounts, securing assets, investigation, contacting the police and/or the insurer.

Disclosure

The association is required to provide all the financial records of the association to the auditor.  All records should be complete.

Auditing practice identifies any material that is omitted or not disclosed as a misstatement if it would have influenced the auditor’s judgement.

What if the audit report is unsatisfactory?

There is always the possibility that the auditor may present an unfavourable report, identifying areas that the association needs to address.

If the association is not clear about what the auditor is saying, it should ask for further written clarification.  In presenting the audit report and findings to the AGM, the management committee should report on the auditor's recommendations and what action has been undertaken to address areas of concern.  To ignore an auditor's report is likely to place the association at risk and increase the exposure of individuals (particularly, the committee) to personal liability.

It may be that there are irregularities in the financial statements of the association, due to a number of factors, such as:

  • a lack of understanding in preparing financial statements;
  • a lack of understanding in assessing financial statements;
  • poor controls over money in and out; or
  • dishonesty.

If problems suggesting dishonesty are found in the financial records, the association should obtain prompt legal advice and attend to any immediate matters such as freezing accounts, securing assets, investigation, contacting the police and/or the insurer.