Just like its for-profit counterpart, accountability and transparency are core to an NGO’s success. With NGO governance being more important than ever, CPAs can help build public trust in social services organizations, and support good corporate governance in Hong Kong. Ben Kwok reports
Illustrations by Roberto Cigna
Hong Kong people are very generous. According to a recent altruism poll, conducted by the University of Hong Kong, 83.5 percent of respondents had donated money to charities over the past year. The problem, however, is the uncertainty around whether charities can be trusted with the money.
Earlier this month, the Hong Kong government announced a series of measures to make the fundraising activities of the city’s charities more transparent. The government also released a 33-page document titled, Good Practice Guide on Charitable Fundraising. Charities are recommended to adopt the guide, “to ensure the accountability and transparency of charitable fundraising activities and the use of donations so received,” the guidelines read.
These measures came as a response to the Audit Commission’s report last year, highlighting that regulations on charities are ridden with loopholes. The number of tax-exempt charity organizations grew 17.5 percent to almost 9,000 between the 2012-13 financial year and September 2016, according to the report.
“It is quite understandable that there is a heightened public expectation of transparency on the part of non-governmental organizations (NGOs), who after all are funded substantially by donation and/or public money,” says Richard Tse, Chairman of the Hong Kong Institute of CPAs’ Community Services Working Group and Co-founder of the CPA for NGO programme. “We also need to recognize that, despite a few unsatisfactory cases, most NGOs are well run, and they perform a very important social function. The social service sector is increasingly focused on governance best practice. We are optimistic that this will lead to improvements in accountability and positive outcomes for NGOs and the community they serve.”
This reminder that NGOs are publicly accountable bodies, despite their charitable nature, was emphasized last month by David Sun, Director of Audit of the Hong Kong government, during the NGO Directors’ Luncheon of the Hong Kong Council of Social Service (HKCSS), a programme supported and hosted by the Institute.
Sun, a past president of the Institute, spoke to over 150 NGO board members on NGO governance and public trust; how his 500-strong team works to help the government and public sector organizations enhance performance and accountability; the importance for NGOs to maintain good corporate governance; and how such organizations can breeze through the audit process.
In 2012, former Hong Kong chief executive Leung Chun-ying brought Sun in to be director of the Audit Commission, one of the city’s most venerable institutions, established in 1844, just three years after the British colony was established.
Sun’s first project after being appointed was to examine the private hospitals in Hong Kong. Seeing how the private sector and religious groups contributed to the well-being of the healthcare sector was fascinating, he said. “Hong Kong is a field of fortune. Hong Kong’s open society, the rule of law and status as an international city enables us to draw many world-class NGOs to come and serve the people. For years, they have contributed a lot and played an important role in providing public service.”
“Today, Hong Kong’s achievement relies on NGOs,” he added. “Because NGO matters, NGO governance matters even more.”
Value for money audit
The Hong Kong Social Welfare Department’s total estimated expenditure for 2018-19 is HK$84.2 billion, and HK$16.8 billion, almost 20 percent of which, make up recurrent subventions to NGOs – up from HK$13.5 billion in 2017 and HK$12.8 billion in 2016.
With more money at stake, the government asked the Audit Commission to look at whether the charities’ income was used solely for charitable purposes. With that, the value for money audit approach began, said Sun, explaining that this is an examination into the economy, efficiency and effectiveness with which any bureau of the government secretariat, department, agency, other public body, public office, or audited organization has discharged its functions.
Through the words of Louis V. Gerstner Jr, the former Chairman and CEO of IBM, Sun highlighted the importance of audit, saying: “People don’t do what you expect, but what you inspect.” The commission looks at organizations of which over 50 percent of income is made up of government subvention. Sun said it tends to look at organizations with money coming from different departments because of the potential risks involved. To help enhance the performance and accountability of the public sector, the commission takes into account the standard of behaviour of the NGO, its organization structure and practices, risk management and control, and reporting and disclosure.
In selecting the audit subject, Sun said his commission would consider materiality, risk and timeliness in the subject matter, while also taking into account whether the audit will provide value-added insight and a high level of auditability. For example, Sun said he had received many requests to examine the Sha Tin to Central rail link, but he was hesitant to immediately take on the issue because the project is still far from finished. An audit at this moment could also raise the unnecessary legal responsibilities issue on the government side, so he would rather wait for a better timing.
He said there were often hot debates within the Audit Commission as to how and how much to audit, depending on the organization and its unique characteristics.
“When we help NGOs to govern better, we are helping many more people, and contributing to the community. This is an efficient model.”
Like the Director of Audit, CPAs in general play a vital role in building public trust in social services organizations. “In the past two decades, the Institute has been a corporate governance thought leader, and a strong advocate of good corporate governance culture,” says Tse, adding that corporate governance and public trust go hand in hand.
“Good governance touches on many aspects of an NGO’s operations, from financial management to reporting and disclosure, from internal control to risk management, and from composition of the board to how board members deliver their duties. When we help NGOs to govern better, we are helping many more people, and contributing to the community. This is an efficient model.”
The CPA for NGO programme was launched in 2013 as part of the Institute’s 40th anniversary, aiming to provide a platform where Institute members can utilize their professional CPA skills to make a difference. “We want to help under-resourced NGOs, particularly smaller ones, who work very hard and yet still struggle to put in place good governance,” Tse explains. “Over the years, the Institute has learned from the experience and sharpened the focus of our community service strategy. We are proud of the dedicated pool of passionate and professional Accountant Ambassadors, who contribute their time and, most importantly, their expertise and through working together, create something unique and impactful for the community.”
Three years later, the Institute became the sole strategic partner of HKCSS for their NGO governance platform project. Through engagement with HKCSS, the Institute has advocated best governance practices to 860 board members and chief executive officers of 280 NGOs, notes Tse. “Our engagement with HKCSS offers precious opportunities to build relationships with NGOs, mapping out the potential cross-sector collaboration to strengthen accountants’ impact on the social service sector.”
Financial reporting, reserve management, risk management and corporate governance are the main issues NGOs face that CPAs can help with. “NGOs are accountable to the donations and public funds received, and they should deliver the effective management of those financial resources. Management should monitor, analyse and evaluate the financial performance of the organization to improve performance, and to communicate important financial information to their stakeholders. While the boards and management of NGOs have good intentions, there have also been cases of mismanagement of funds that have caused public concern,” Tse explains. “As CPAs, we can help them with basic accounting knowledge and control, and raise their awareness of potential pitfalls.”
Many charities also face challenges managing their reserves, key to financial stability and their long-term sustainability. “CPAs can guide NGOs to establish a reserve policy setting the target level, and conduct reviews ensuring sound financial management,” says Tse.
NGOs for CPAs
While the programme provides Accountant Ambassadors a sense of fulfilment and doing good, the experience itself – hosting seminars, running workshops and meeting honorary treasurers of NGOs – can be demanding. “Very rarely are CPAs representatives of NGOs,” Tse explains. “The unique volunteering experience itself is a challenge to our soft skills but also a bridge to develop them. Communication has always been a desirable soft skill for all in the workplace. Becoming an articulate speaker in front of non-CPAs is a useful training opportunity, which helps us stay competitive in the accounting profession where everyone has similar technical skills.”
One challenge, Tse adds, is catering to different NGOs’ needs. “Every NGO is unique,” he says. “You really need to find out their specific issues in order to tailor-make coaching sessions. It challenges the Accountant Ambassadors to stay creative and flexible. They need to think outside of the box to offer solutions – this itself involves Accountant Ambassadors in problem-solving as well.”
Since launching, the programme has enlisted more than 170 Accountant Ambassadors and reached more than 1,500 board members, CEOs and other executives from 380 NGOs through programme activities. “The number of NGO members involved reveals the strong service demand and expertise needed in the sector, as well as the potential impact the accounting profession can bring,” Tse says.
Tse says he is looking forward to reaching out to more NGOs, strengthening their financial reporting skills, and helping to build public trust in the sector. He believes there is more work to be done. “We hope to build on our thought leadership in corporate governance, and specifically think about the unique challenges facing NGOs,” he says. “For instance, we often hear that if and when an NGO gets additional funding, they will intuitively put it towards providing more services, rather than towards hiring an accountant. This is therefore somewhere that different thinking could apply.” By hiring an accountant, he adds, the NGO may improve their financial control and management, so that its funds may benefit more for more people.
CPAs, Tse adds, have the potential to become enablers of charities. “These NGOs provide over 90 percent of social welfare services in Hong Kong, and many are small, and require and deserve every help we professionals can give.”
“Every NGO is unique. You really need to find out their specific issues in order to tailor-make coaching sessions.”
Initiatives for good
Since 2016, the Institute’s CPA for NGO programme has launched two initiatives, Pro-bono advisory service to NGOs and NGO Treasurers’ Club Workshop Series, to further support NGOs in strengthening their financial system and reporting, reserve policy, internal control, and governance for achieving sustainable development.
The Pro-bono advisory service to NGOs pairs two Accountant Ambassadors with each NGO for six months to offer free face-to-face advisory sessions focusing on advising them on governance and financial management issues. “Through the process, we collect feedback which we use to inform the programme of common issues faced by NGOs, so that we can refine our service and become more effective in offering relevant advice, which in turn benefit the NGOs,” says Richard Tse, Chairman of the Hong Kong Institute of CPAs’ Community Services Working Group and Co-founder of the CPA for NGO programme. “This allows us to publish guidebooks that address common issues, which are distributed widely to benefit even more NGOs.”
NGO Treasurers’ Club Workshop Series is a series of six workshops that aim to equip NGO board members, especially honorary treasurers, with the relevant knowledge needed to discharge their duties relating to financial management, budgeting, auditing and governance and accountability, explains Tse.
“Most NGOs cannot afford hiring a CPA who can identify potential risks, and honorary treasurers are often not financially trained but yet have financial oversight responsibilities. By equipping the gatekeepers, we are helping the NGOs address the issues before they became problems.”
For NGOs, the six common audit findings are: (1) slow response to service demands; (2) inadequate or inappropriate usage of assets; (3) inadequate coordination between bureaus/ departments; (4) non-compliance with rules and regulations; (5) incorrect or inadequate reporting or disclosure of key performance indicators; and (6) governance (attendance, conflicts, expenses)