Keeping Your Reputation – Integrity Risks for NFPs

Written by: David Barefoot – June 16 2016

Published Better Boards June 13, 2016 http://betterboards.net/strategy-risk/keeping-reputation-
integrity-risks-nfps/

Recent cases questioning the integrity of some Not-for-Profit (NFPs) organisations highlight changing

accountability requirements for the sector. As more public funds are provided to the NFP sector to

deliver public services a higher level of public accountability is being applied to the sector. NFPs able

to negotiate this transition will distinguish themselves in the market.

For some, the recent Anzac commemorations were tainted by the Department of Veteran Affairs
stripping the Camp Gallipoli Foundation of its permit to use the protected word “Anzac”. This came
as a result of an investigation by Fairfax Media which suggested that the CEO of the charity may have
inappropriately received payments of up to $1.5 million and that significant sums of money collected
by the organisation were not passed on to veteran associations.

Recent revelations that the Shane Warne Foundation only passed on 11% of its income in 2014 to its
charities, that it spent $281,000 raising $279,000, and that it could not properly account for the
money raised, were followed by the personality closing the charity down, which prevented further
scrutiny of the organisation’s financial records. Warne’s statement in an interview with Channel Ten,
“you can all get stuffed if you want to have a go at us …” exhibits a common lack of understanding
about public accountability expectations and how good intentions can go so easily astray.

Internationally, we heard that millions of dollars worth of funding has been withdrawn from the
International Rescue Committee (IRC) and three other international NFPs providing services to
Syrian refugees over alleged bid-rigging and bribery. And reminding us that no organisation is
immune to integrity lapses, we also heard that the world’s number one anti-corruption NFP,
Transparency International, lost one of its senior officials to the Panama Papers scandal. NFPs cannot be complacent about integrity risks. As far as corruption goes, for example, NFPs are as
susceptible as any other type of organisation, arguably even more so. This is because NFPs engage in
high corruption risk activities as a necessary part of their work. These activities include:

Services to the disadvantaged

  • Providing a service to the community where demand frequently exceeds supply. In these
    situations people can be desperate and as a result look for ways to increase their chances of
    getting help sooner than later. Officials with the power to provide access to what can be lifeline
    services can be tempted to provide special access for a secret commission. The lower
    wages of the NFP sector also increases the chances that officials may be subject to financial
    stress, a factor known to increase susceptibility to corrupt conduct.
  • Providing a service (which might include financial assistance) to new immigrants and other
    vulnerable groups, such as the disabled, the poor and children at-risk. Vulnerable groups are
    known for being less able to advocate for themselves. It is less likely for these groups to raise
    alarm bells or even understand when an official is abusing their position.

Make decisions that have an impact on people’s lives

  • Making judgements/determinations about individuals or disputes, or providing the results of
    medical tests, such as in the case of Hospitals or organisations like the RSPCA. In these cases,
    someone’s work can have significant impacts on the life of others. The risk is that officials
    responsible for such decisions/work will become vulnerable to personal incentives to
    unfairly advantage one particular party.

Industry governance

  • NFPs are less regulated but have high governance challenges, e.g., they can have staff
    working unsupervised for large portions of time, generally rely more on the honesty of staff
    as a control, and place more value on having persons related to service recipients involved in
    the management of the service. These factors present governance risks for the organisation
    and the sector, such as conflicts of interest, monitoring and oversight and industry
    accountability risks. Together with the above, such as the vulnerability of clients and their
    disadvantage position as consumers (lacking a clear understanding of the product they are
    supposed to be receiving), this means that NFPs have to control more with less.
  • Collecting a lot of funds from individuals and bodies that are not involved in scrutinising how
    the money is spent, such as those organisations that collect donations, etc.from the public. In
    these situations the authority of the payer is lost. The ‘principal’ of the contract is not the
    person monitoring the suitability of the service. The actual receiver is often glad to receive
    whatever support they can, unable to appreciate whether or not they are receiving the full
    value or intent of the funds donated.

Over the decades the governance requirements of government bodies have grown in order to keep
up with public accountability expectations. Despite the establishment of the Australian Charities and
Not-For-Profit Commission (ACNC) in December 2012, many still feel that the governance regulation
of NFPs has not caught up with community expectations. As Sandra van der Laan, Professor of
Accounting at the University of Sydney, suggests there are three key issues:

  • There is no requirement for charities to have someone financially competent involved in
    running the organisation.
  • The delay in response of regulatory agencies when problems are identified (e.g.,
    organisations remaining registered when they have not complied with ACNC reporting
    requirements).
  • Charity regulation currently focuses on “income” and there is “no strict regulation on the
    way donations to charities are spent”.

Organisations ahead of the game have internal integrity frameworks that reflect those in the private
and public sectors, informed by standards such as the Australian Standards AS 8000—2003 Good
Governance Principles, including AS 8001—2008 Fraud and Corruption Control (though these
standards were also created with the NFP sector in mind). Sector leaders understand that as a
service receives more public funds to deliver public services, expectations concerning their
accountability slowly move from the private to public sphere. As this happens organisations have to
do more to control themselves, and be seen to do so. They need to become publicly accountable.
This is because:

  • The market does not control efficiency in the public spheree. Public entities (including those
    that provide a service to the public funded by the taxpayer) often operate as ‘monopolies’ and
    so free market competition doesn’t keep them lean.
  • There is a disconnect between payer and receiver.Bodies that receive public funds
    (particularly NFPs) are often servicing people who do not pay directly for the service and are
    vulnerable or disadvantaged. As discussed above, they are less able to hold the deliverer
    accountable.
  • The money provided from the public is given in trustThis is why tabloids abound with stories
    about the improper use of even small amounts of ‘tax payer’ funds; the dollar threshold for
    stories about private sector misappropriation is much higher.
  • Perception is ‘nine-tenths of the law’Public institutions not only have to do the right thing,
    but also need to be seen to be doing the right thing in order to maintain social order, a healthy
    market and the efficient use of public funds. As NFPs become a greater part of the
    institutional fabric of our society, their behaviour reflects on the whole public system, which
    includes law and order institutions. This is why the NSW ICAC Act includes within its definition
    of corruption the ‘conduct of any person (whether or not a public official) that impairs, or
    could impair, public confidence in public administration…

Based on this understanding integrity frameworks have the best chance of being effective. Integrity
frameworks are made up of policies, strategies and action plans, as well as tools, such as conflicts of
interests procedures, whistle blowing processes and protections, risk management, auditing, codes
of conduct, probity in procurement procedures, investigation processes and systems, staff induction
etc. Most of all they deal with how these systems interact and synergise as part of the daily work of
the organisation. For this to happen, there needs to be an understanding of the philosophy around
public accountability, its role in society and how it adds value to the work of the organisation.

It is also worth remembering that these organisational mechanisms not only attack corruption but
also impede other organisational ‘diseases’, such as bullying; the balance of evidence shows
organisational factors rather than individual personality traits are the main potential causes of such
problematic behaviours.

Integrity frameworks therefore have a lot more to offer an organisation than just resistance to
corruption; they can help make an organisation more effective and efficient, promote compliance
and provide a better work environment for staff.

 

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