All incorporated associations must:

• keep financial records that correctly record and explain the financial transactions and the financial position of the association in a manner that can be conveniently and properly audited; and
• submit accounts to the members at each Annual General Meeting. 

In addition to these legal obligations, an association's management committee needs clear, accurate and up-to-date financial information to ensure the association is viable and operating efficiently. 

How an association organises its accounts, payments and record keeping will vary depending on the size and complexity of its financial situation. A small association may have a voluntary treasurer who 'keeps the books' while an organisation requiring more skilled accounting services might employ its own finance staff or engage an accountant or book-keeper.

Good financial practices

It is good financial practice to develop policies and procedures regarding:

• preparing budgets;
• recording income received such as grants, membership fees, donations, fundraising, sales of goods and interest;
• developing a system to record and pay necessary bills;
• recording and authorising petty cash transactions;
• where necessary, recording taxation information, such as goods and services tax, superannuation, fringe benefits, income tax records and withholding payments;
• where necessary, recording salary and leave payments, and reimbursements to employees. Time and wages records must be kept in accordance with the relevant award or industrial law;
• undertaking bank reconciliations (i.e. checking association records against bank records);
• maintaining an up-to-date register of association assets; and
• maintaining an effective and secure filing system for insurance policies, leases, contracts and funding agreements.

The Act requires the annual financial statements (tier 1) or reports (tiers 2 and 3) to be presented to the members at each AGM. Time must be allocated for the treasurer or other committee member to present a summary of the accounts and explain the major items. Members should also have the opportunity to ask questions. Ideally copies of the accounts should be available to members at the meeting, accessible online or circulated before or after the meeting.

The members’ rights to view the financial records at other times will depend on the inspection of records provisions in the rules.

The financial reporting responsibilities of an incorporated association will depend on the tier that it falls into.  The purpose of this system is to minimise the reporting burden for small associations while ensuring that larger associations are accountable for the significant resources they control.

An association’s tier is determined by its annual revenue which is calculated based on the total amount of money received through the association’s activities during a financial year.

The tiers are set as follows:

• Tier 1: less than $500,000 in revenue.
• Tier 2: over $500,000 but under $3,000,000 in revenue.
• Tier 3: $3,000,000 or above in revenue.

Calculating revenue

Revenue is calculated in accordance with the Australian Accounting Standards and is the income that arises in the course of the ordinary activities of an incorporated association before any allowance is made for any relevant tax liabilities.

The following examples are likely to be revenue if they relate to the association’s ordinary activities:

• membership fees and subscriptions;
• fees and charges for provision of services;
• interest earned;
• government and other grants, donations, bequests, sales of goods and inflows from other fundraising activities.

The following is not included in the calculation of revenue:

• gains from the sale of non-current assets eg club property;
• unrealised gains (profit which has been made but not yet realised through a transaction) eg revaluation of inventory or club property; and
• amounts collected on behalf of third parties.

One off increases in annual revenue

Sometimes an association’s revenue may increase because of a one off or unusual event and this increase pushes the association into a higher reporting tier. For example the association is awarded funding or receives a particularly large donation. If the association wishes to continue reporting in accordance with its usual tier an application can be made to the Commissioner to be declared as a specific tier for that particular financial year.

This application must be made no later than three months after the end of the financial year and will only be granted if the Commissioner is satisfied that the change in revenue is the result of unusual and non-recurring circumstances. 

Requirements for a Tier 1 association

To understand the reporting requirements of a Tier 1 association you need to know whether the association keeps its accounts on a cash or accrual basis.

Under cash accounting the income is recorded when it is received and the expenses when they are paid.

Using accrual accounting the income is recorded the date it is earned (irrespective of whether the payment is actually received on that date) and the expenses when they are incurred. This method is more common where the association delivers services in return for payment or receives grants to complete particular projects.

The financial statements of an association operating on a cash basis may include a:

• statement of all the monies received and paid during the financial year;
• reconciled statement of all bank account balances as at the end of the financial year; and
• statement detailing the association’s total assets and liabilities as at the end of the financial year.

An association operating on an accrual basis may prepare a financial statement that includes:

• a statement of the income and expenditure for the financial year; and
• a balance sheet.

Auditing requirements for Tier 1 associations

Under the Act a tier 1 association is only required to complete a review or audit of its accounts if:

• the majority of members at a general meeting pass a resolution that an audit will be completed; or
• the association is directed to do so by the Commissioner.

If the decision to review or audit the accounts is made by a resolution of the members, the requirements of the Act regarding the qualifications, appointment and removal of the reviewer or auditor become applicable.

Where it is a condition of a funding agreement or licence that an audit be completed, the members will need to pass a resolution at a general meeting that an audit be undertaken.

Requirements for a Tier 2 association

A Tier 2 association is required to prepare an annual financial report that complies with Australian Accounting Standards and contains all of the following:

• the financial statements for the year (includes an income and expense statement, balance sheet, cash statement and statement of changes in equity);
• the notes to the financial statements including all disclosures required by the accounting standards and information required to give a true and fair view of the financial position; and
• the management committee’s declaration.

The Management Committee Declaration

The committee must pass a resolution declaring whether:

• there are reasonable grounds to believe that the association will be able to pay its debts when they become due and payable; and
• the financial statements and notes have been prepared in accordance with the requirements of the Act.

The declaration included in the financial report must specify the date of the committee’s declaration and be signed by at least two authorised committee members.

Review requirements for Tier 2 associations

All Tier 2 associations must have their financial reports reviewed and the review report must be presented to members at each annual general meeting.

Reviewer qualifications

A review must be conducted by an independent person who is:

• a member of Chartered Accountants Australia and New Zealand (CA or FCA), CPA Australia (CPA or FCPA) or Institute of Public Accountants (MIPA or FIPA);
• a registered company auditor; or
• approved by the Commissioner for Consumer Protection.

Before the appointed reviewer begins they must provide the committee with a written independence declaration.

Differences between a review and audit

The process of reviewing an association’s accounts is not as detailed as completing an audit.  A reviewer will look over the report and advise whether anything has come to their attention to suggests that the report does not comply with the requirements of the Act.

In comparison, an auditor must collect evidence relating to the financial records and transactions to satisfy themselves that the report is a true and correct reflection of the association’s finances.  This enables them to provide a formal opinion whether the accounts meet the relevant legal requirements.

When an audit is required

Under the Act a tier 2 association is only required to audit its accounts if:

• the majority of members at a general meeting pass a resolution that an audit will be completed; or
• the association is directed to do so by the Commissioner.

Requirements for a Tier 3 association

Tier 3 associations must prepare an annual financial report in accordance with Australian Accounting Standards that includes:

• financial statements for the year;
• notes to the financial statements; and
• management committee’s declaration.

The Act requires all Tier 3 associations to have their annual financial report audited and a copy of the audit report must be presented to the members at each annual general meeting.

Auditor qualifications

An audit must be conducted by an independent person who holds a current Certificate of Public Practice and is:

• a member of Chartered Accountants Australia and New Zealand (CA or FCA), CPA Australia (CPA or FCPA) or Institute of Public Accountants (MIPA or FIPA);
• a registered company auditor; or
• approved by the Commissioner for Consumer Protection.

The auditor must provide the committee with an independence declaration prior to commencing work on the audit.  The audit report must:

• include a statement whether, in their opinion the financial statements or report have been prepared in accordance with the Act.  If they are not of this opinion they must explain why.
• describe any defects or irregularities identified in the financial statements or report;
• include any statements or disclosures required by the auditing standards; and
• specify the date the report was prepared.

The management committee may appoint the auditor or reviewer for the purpose of meeting the Tier 2 or 3 reporting requirements. Where the auditor or reviewer is appointed by the management committee they will remain in office until their report has been presented for consideration at the annual general meeting (or they resign).

If the association appoints an auditor or reviewer for any other purpose such as at the request of the members or to provide ongoing services the appointed auditor or reviewer will then remain in office unless they:

• resign;
• are removed from office;
• cease to be qualified to conduct audits or reviews;
• die; or
• become an insolvent under administration.

To ensure there is a clear understanding of the duties and responsibilities of the auditor or reviewer the committee should request an engagement letter setting out:

• their responsibilities;
• the scope of the work to be completed;
• the total cost; and
• the expected time frame is for completion.

The auditor or reviewer must be independent and the association should avoid appointing:

• a past or present member of the management committee;
• a member of the association;
• an employee, supplier of goods or services or a servant of the association; or
• an employer, partner or family member of a member of the association’s management committee.

An appointed auditor or reviewer may resign at any time by giving written notice to the association. If this occurs the association must lodge notification with Consumer Protection within 14 days.

To remove an appointed auditor or reviewer requires members to pass a resolution at a general meeting of the association. Written notice of the intention to move such a motion must be given to all members at least two months before the meeting is held.

It is also required that a copy of the notice is sent to the auditor or reviewer and the Commissioner for Consumer Protection (form available for this purpose).

Once the notice has been received the auditor or reviewer has 30 days to make a written submission to the committee. If such a submission is received the committee must give a copy to all members at least seven days before the meeting and allow the auditor or reviewer to attend the general meeting and speak to the members prior to any vote taking place.

A resolution to remove the auditor or reviewer will have no effect if the above actions are not completed.

Under the Act an appointed auditor or reviewer is entitled to:

• receive all notices and communications that are sent to members regarding general meetings of the association;
• attend any general meeting of the association; and
• be heard at any general meeting where the business being discussed relates to their functions as the auditor or reviewer.

It is the responsibility of the association’s committee to ensure that the above rights are afforded to the auditor/reviewer.

It is the responsibility of the management committee to provide the financial statements. The role of the auditor or reviewer is to give a professional and independent on these financial statements.  The review or audit of an association’s financial report can ensure greater accountability to the members and provide an assurance that all funds received by the organisation have been correctly accounted for.

The committee should not rely on the auditor to find all errors in the statements and identify any fraud. It remains the committee’s responsibility to pay close attention to the association’s financial statements at all times.

The auditor's task is to provide a professional opinion on the state of the financial affairs of the association. Auditors have a legal responsibility for their opinion and can be held liable for negligence if the audit is not completed according to professional standards, or for damage to the association as a result of negligence.

What if the audit report is unfavourable?

There is always the possibility an auditor may present a critical report identifying areas that the association needs to address. To ignore an auditor's report is likely to place the association at risk.

If the association is unsure what the auditor is saying its should seek clarification as irregularities in the financial statements could occur for a number of reasons including:

• a lack of understanding in preparing financial statements;
• a lack of understanding in assessing financial statements;
• poor controls over money in and out; or
• dishonesty.

If problems suggesting dishonesty are found in the financial records, the association should obtain prompt legal advice and attend to any immediate matters such as freezing accounts, securing assets, investigation, contacting the police and/or the insurer.