Last updated 26 May 2022
Charity governing bodies have a legal duty to appropriately manage the organisation’s risks. Effective charity risk management is not just a matter of having a risk management policy and a risk register. It is rather, a process requiring careful planning and ongoing commitment from the directors and officers.
In this article, we discuss the overall process of managing charity risk and identify some of the key areas of risk for religious charities.
Steps to identifying charity risks
There are two broad steps involved in identifying charity risks which are crucial in setting the foundation to risk management.
- Brain-storming session: Used to identify key risks based on their likelihood or frequency and their potential consequences.
- Follow up session: Necessary to identify the key tools and methods available to the organisation to help mitigate the identified risks.
- Charities may benefit from regular reviews of the risk management plan, as well as establishing a strategy and plan to improve the organisation’s risk management over a longer time frame.
Areas of risk for charities
Every charity is different – a key area of risk for one organisation may be of low risk for another. It can be helpful to run through a checklist or research how other charities are thinking about particular risks.
Governance Standards & Governing Documents
Complying with Governance Standards including the legal duty to ensure the charity operates according to the objectives expressed in its governing document should be a high priority.
For this reason, identifying risks in the organisation’s operations that could cause it to breach governance standards is crucial for directors.
Insolvent Trading
Responsible persons have a legal duty to avoid the charity operating whilst insolvent. Therefore, it is not surprising that many boards would rate the management of their charity’s financial risks as a high priority.
Without adequate financial controls and reporting, a charity will struggle to ensure it is collecting sufficient revenue from donations and other sources to fund its operations and programs.
Additionally, if a charity does not have a budget, it will struggle to know whether a decision to support a new program of relief is affordable.
Financial Management
Essential strategies to ensure a charity can continue to meet its planned commitments and contingencies include:
- Planning and managing its liquidity requirements
- Reserving when it makes a surplus
An organisation can plan its needs for reserves or liquidity by:
- Understanding its financial dependencies (for example a lack of diversification in its donor sources) compared to its financial commitments.
- Guarantees given to third parties (for example, an agreement to fund an orphanage).
Fraud
The risk of fraud or loss in collecting and distributing funds collected for a charitable purpose must be managed with effective financial controls and delegations.
AML/CTF
Taking steps to properly identify and screen donors and the source of donated funds helps ensure the charity avoids breaching anti-money laundering and counter-terrorism financing laws.
Such measures go hand in hand with due diligence and appropriate contracting with third parties to mitigate counter-party risks.
Vulnerable persons
Charities rely on their people – whether its directors, staff, or volunteers – to do the right thing.
Charities carry additional risks when dealing with vulnerable persons and are expected to have strategies in place to manage the risk of harm, exploitation and abuse of the vulnerable people they deal with – including, the beneficiaries of their services as well as their own staff and volunteers.
Overseas operations
These risks are sometimes magnified and can be more difficult to control if the charity operates overseas or relies extensively on third parties to deliver relief.
Managing risks appropriately can help build and sustain a charity’s reputation. Failing to do so will bring the regulator’s attention and may do irreparable reputational harm.
How Birchgrove Legal can review and develop your charity’s risk management system
We can help with:
- Tailored workshops to identify risks
- Reviews
- Policies and strategies to help improve charity risk management
Please get in touch for a confidential discussion with Birchgrove Legal NFP Team today on (02) 9018 1067.
