Rescue service in need of a lifeline

On July 1, a new government regulator opens its doors, the Australian Charities and Not-for-profits Commission, whose role is to preserve and enhance public confidence in the not-for-profit sector.

On its register will be the National Safety Council of Australia, the not-for-profit agency with the most vivid history of any in the country.

Under the charismatic stewardship of John Friedrich the NSCA had embarked on a dizzy expansion program during the 1980s, assembling a fleet of aircraft, helicopters, state-of-the-art watercraft, and even a submarine.

Yet the shipping containers full of rescue equipment which Friedrich had pledged as collateral to borrow hundreds of millions from the banks were finally found to be empty. The jig was up.

Friedrich was, as it turned out, an illegal immigrant from Germany. Three days before he was to testify in court, he tragically took his own life.

The NSCA certainly doesn’t enjoy the profile it used to back in John Friedrich’s day at the organisation’s Victorian division but an examination of its financial accounts does suggest the need for some form of monitoring and regulation. The not-for-profits (NFPs) sector is rife with compliance breaches and accidents waiting-to-happen.

A series of investigations by BusinessDay this year found endemic compliance problems in far larger organisations: even the failure of billionaires Clive Palmer and Gina Rinehart’s companies to file their annual accounts – and the same from a slather of multinationals which operate large infrastructure projects in this country. Some regularly filed late, others not at all.

Not-for-punctuality

The standard of reporting and compliance among NFPs – many of which struggle to get funding and risk and audit expertise – is no better. Often they fail to lodge their financial statements on time, mostly they fail to publish them on their websites so all stakeholders and the public – which support them via donations and tax breaks – can view them.

We take the NSCA as an example. There is no suggestion of law-breaking as was the case in Friedrick’s day.

But the compliance is substandard, nonetheless. For a start, its June 2011 accounts were filed months late, enough to give the jitters to creditors and any staff who might have been concerned.

Not only does the NSCA owe the tax office more than $1 million, it also has been six months late paying staff super and its accounts are in negative equity.

Lifeline

In fact the NSCA – which is now the peak provider of occupational health and safety (OH&S) services rather than an emergency response group – is on a lifeline itself.

The accounts show it is only trading because the Tax Office has agreed to a payment plan for the NSCA to pay down its $1.5 million in PAYG tax liabilities gradually.

It is quite plausible that a private firm operating in this sort of precarious financial state would already have been placed in external administration.

There is also a restatement of 2010 accounts from a $30,000-odd loss to almost $500,000 relating to the tax debt and to credit card expenditure. The “profit” for 2011 was only achieved by the neat trick of capitalising expenditure on web development.

There appear to be three errors all up in the 2010 accounts, all of which resulted in things looking better than they should. Besides the understatement of PAYG tax liability, there were unrecorded credit card expenses of $98,000 and superannuation under-provision of $30,000 turning a small $32,000 loss into a $500,000 loss.

The latest claimed small profit of $36,000 for 2011 could easily be adjusted to another sizeable loss if the more than $340,000 of website development costs were written off rather than capitalised.

Strange inclusions

Other strange aspects of the accounts include the inclusion of more than $400,000 of bank overdraft liability as a trade and other payable.

The debt to the Tax Office is also included in this category.

NSCA is technically insolvent with negative net assets of $ 1.1 million as a result of the $1.5 million tax debt, although it says it is meeting its agreed payments to the ATO on a timely basis and is cutting expenses.

One other interesting aspect is that these accounts were audited by BDO Audit (NSW and VIC) Pty Ltd. This firm was expelled from the international BDO network in March 2012 due to unspecified risk issues.

Press reports last week cited former partners of BDO in Sydney and Melbourne being pursued for $1.1 million in bad debts by a professional indemnity insurer.

All up, the NSCA is not a pretty picture when it comes to compliance. Yet it is hardly alone. And when the new sector regulator is up and running in a few weeks time, it will surely have its work cut out.

It is unclear whether the Tax Office allows other non-profit organisations to pay their PAYG tax liabilities on a slow repayment schedule.