New reporting standards mean NZ's $64bn not-for-profit sector has to be more transparent.

New Zealand has one of the densest populations of charities and not-for-profit organisations (NFPs) in the world but few know how to deal effectively with new rules requiring them to be more transparent.

Henry McClintock, Audit and Assurance Partner and NFP Specialist with business advisory firm BDO, estimates the majority of New Zealand's growing NFP sector are finding it challenging to cope with new regulatory demands that they report not only on financial matters but non-financial as well.

The scale of the sector is significant. In the year to June 2016, there were 28,000 registered charities in New Zealand, managing about $64 billion in assets (though nearly a third recorded less than $10,000 in revenue) and employing about 100,000 people.

A New Zealand Herald series in June last year took a deeper look at the risks and challenges facing the sector, including a series of investigation reports prepared by regulatory body Charities Services. It showed charities occasionally have trouble following rules about who manages them and transparency.

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"These failings raise the risk of funds going missing, and in several cases investigators found evidence that charities were being run for personal gain, not for charitable purposes," the Herald inquiry said. "And Charities Services' Operation Timepiece raised concerns about the risk to both the local charitable sector and the tax base over 'complex structure[s] that appeared to be designed to obscure the origin of funds'."

However, McClintock says the vast majority of NFPs in New Zealand are "as honest as the day" but need help in dealing with new rules aimed not only at monitoring how much money they raise and spend – but also how they use it and their effectiveness within their chosen charity sphere.

It's not, he says, as if the New Zealand NFP sector is full of people like Roger Chapin – the disgraced United States "non-profit entrepreneur" who died in 2013 after allegations he used some of his charities to enrich himself and friends, while spending too little on the causes he supported.

Among Chapin's charities were two aimed at helping US war veterans but a Congress investigation found that only about 25 per cent of the US$168m ($245.5m) raised between 2004-2006 went to veterans. During that period, Chapin and his wife received US$1.5m in compensation plus US$340,000 to cover hotel, restaurant and other expenses and US$446,000 to purchase a condo unit.

McClintock says wrongdoing is not the main thrust of the new reporting rules. After all, in 2016 only one charity out of 28,000 was deregistered for serious offending, with nine others either voluntarily deregistering as a charity or being issued formal warning notices by Charities Services.

"However, what is being asked of NFPs now is a much more holistic approach to their operations," he says. "Most large charities are doing this already but what's being asked now is that NFPs report not only how much money they raise and spend – and we help a lot with financial reporting – but what they have achieved with that money."

The new rules are all about minimum standard requirements, allowing the NFP sector to grow trust and confidence in their operations – and was good for NFPs in another area: competition.

"Our NFP and charity sector is highly competitive," he says. "There's a huge battle out there for the charity dollar, especially when you consider New Zealand has one of the highest charities per head of population measures in the world.

"So being able to show you meet these reporting standards must be good for NFPs in a competitive arena. It will also be beneficial for them in that it will address areas many of them are not very good at – like being able to demonstrate where the money went and how much good it did."

The reporting requirements ask NFPs to measure the impact of their spend – something not always easy to define.

"It can be difficult," says McClintock. "Take the example of a charity trying to help reduce child poverty. They can show what they did and how much they spent – but how do they measure how much impact it had on child poverty. That's often where they need a bit of help."

In the end, NFPs would benefit by being able to attract sponsors and benefactors by showing them the advantages and tangible benefits of "impact investing".

"On a more personal or individual note, it enables them to answer questions from a person who rocks up and gives them $20 – and then asks what difference that $20 made."

For more information download BDO's free guide to Impact Reporting for Not-For-Profits at www.bdo.nz/nfp