As previously advised the proposed overhaul of our Incorporated Societies legislation has now been released for public consultation in New Zealand. [Involved in an Incorporated Society? Big changes coming!] Hence if you are in any way involved in an incorporated society now is the time to start to understand the implications, and then exercise your democratic right. Too often we receive complaints from clients and contacts about legislation changes once they have been enacted and have become effective. If you want to have your say; now is the time to act!
We have a number of explanatory articles regarding the proposed new legislation coming to assist you. However, being accountants and auditors we thought it fitting that we should start with a look at the proposed accounting and audit requirements.
Proposed accounting for incorporated societies
New Zealand has recently gone through a hugely significant overhaul of its financial reporting framework. This has resulted in a two sector, multi-tier accounting standard framework. As such we now have accounting standards that are sector and entity size appropriate. These accounting standards are issued by the Government’s accounting and audit standard setter, the External Reporting Board (XRB) and are considered generally accepted accounting practice (GAAP).
Previously incorporated societies, in most cases, were not required by law to comply with GAAP. Due to this lack of requirement under the incumbent 1908 Act to follow GAAP the result has been a hugely variable quality of financial reporting by incorporated societies. Sadly, much of the financial reporting for incorporated societies has been of very poor quality. This is not helpful for readers of this financial information.
The proposal is for all incorporated societies in future to follow the appropriate XRB accounting standards. Given that these are now sector and size appropriate in New Zealand we think this proposal is appropriate and eminently sensible.
We also think that it will be beneficial for the whole sector and all stakeholders interested in it as it should result in financial reporting that:
- is cost appropriate relative to the incorporated society size; and
- will result in greater consistency of financial reporting and hence comparability between entities.
Good accounting assists in appropriate accountability.
Proposed public filing of financial statements
Both the incumbent and the proposed new legislation require incorporated societies to file their annual financial statements on the public register. We think this makes sense as regards ease and cost-effectiveness of access to annual financial statements by the society’s members, and others who may be interested in them.
The proposed new legislation also clarifies that if the incorporated society is required to file its financial statements by some other legislation, such as the Charities Act 2005, then it will only have to file on that public register.
And what about audit?
The incumbent 1908 Act is silent on audit. This stance has also been adopted by the proposed new Act. i.e. there is no legislated mandatory audit or assurance requirement proposed for incorporated societies.
Obviously if an incorporated society is also a registered charity, and it meets the assurance thresholds under the Charities Act, then it must comply with that legal assurance requirement. However, this is in its capacity as a registered charity and not merely as an incorporated society. There may also be other less common legislation that may impose an audit requirement on some incorporated societies due to their activities. For example, if a society was running a retirement village or otherwise was considered an Financial Markets Conduct (FMC) Act reporting entity then it would need to comply with the financial reporting and assurance requirements of that applicable legislation. We do however, expect the number of such cases to be relatively small in the population of NZ incorporated societies.
The audit requirement has been well debated and we believe that the right landing place has been reached - Yes I know; we are auditors and potentially doing ourselves out of a job with that comment! However, the logic appears sound. The policy rationale is firstly based on the fact that, unlike registered charities that are accountable to wider society due to their tax exemptions, most incorporated societies are only accountable to their members. Also taken into account is that audit or other assurance, done properly, comes at a cost. If legislation requires independent assurance, then it is important it is done properly and specifies appropriately qualified assurance providers. Hence the cost this would impose.
However, should an incorporated society if it is not a registered charity or otherwise reporting to a large external stakeholder group be burdened with such a mandatory cost? Or put another way; would the mandatory cost outweigh the benefit of independent assurance? The reality is that many incorporated societies are only reporting to their members, with limited or no significant external stakeholders. Hence in that case it should be a matter for the members to decide if they believe that the cost of assurance is justified, or alternatively if they are happy not to demand independent assurance.
We suspect that many incorporated societies will still voluntarily choose to require independent assurance over their annual financial statements under any new legislative regime. This may be influenced by such factors as the number of members, the types and level of assets & liabilities and activity of the particular society. And that may be a valid and sound governance decision. But the key is that it should be a positive decision rather than just a default position….and this is especially the case for small incorporated societies where the audit cost will likely be a proportionally greater expense due to their small size.
For more information on the proposed new Incorporated Societies legislation refer to http://www.mbie.govt.nz/info-services/business/business-law/incorporated-societies