Identifying and managing the risks a charity faces are among the most important duties attaching to their governing bodies and personnel. This insight explores risk management as an area of focus for charities, and what leaders ought to know and do in this regard.
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.
It generally starts with a brain-storming session to identify the key risks based upon their likelihood or frequency and their potential consequences.
A follow up session is usually 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.
What are some of the key areas of risk for charities?
Every charity is different. So, what is a key area of risk today for one organisation may be a low area of priority 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 objects expressed in its governing document should be a high priority – so identifying risks in the organisation’s operations that could cause it to breach governance standards should be a key priority for directors.
Responsible persons have a legal duty to avoid the charity operating whilst insolvent. So, it is not surprising to that many boards would rate the management of their charity’s financial risks as 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. Without a budget, it will struggle to know whether a decision to support a new program of relief is affordable.
Planning and managing its liquidity requirements, reserving when it makes a surplus, are essential strategies to ensure the charity can continue to meet its planned commitments and contingencies.
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 its financial commitments or guarantees given to third parties (for example, an agreement to fund an orphanage).
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.
Similarly, 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.
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.
These risks are sometimes magnified and can be more difficult to control if the charity operates overseas or relies on 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.
Are you looking for help to review or develop your charity’s risk management system?
We can help with:
- Tailored workshops to identify risks
- 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.