Staff Post
By Heather Young

CBC News’ recent article on the woes of the Black Business and Professional Association raises interesting questions for me.

Briefly, the association engaged both a member of the board of directors and its executive director to provide consulting services through their respective companies, and then did not adequately disclose these related-party transactions in its T3010 Charities Return or in its annual financial audit.

The CBC, with contributions from Charity Intelligence Canada, has presented these infractions in light of a scandal. Indeed, anyone with sectoral expertise knows how vulnerable charities can be to manipulation and personal profiteering, so it’s hard to argue when journalists and watchdogs shine a spotlight on suspected “bad apples.”

A tale of improper behaviour allows us to shake our heads and say to ourselves, “that would never be me!” I think it’s worth exploring the story from a different angle; that is, as a cautionary tale from which other charity leaders might draw important lessons.

Perhaps this was a series of errors with no ill-intent – every bit as serious from both management and regulatory standpoints – but blunders to which any charity could be prey if safeguards weren’t in place.

I should say a couple of things up-front.

First, I don’t know any of the players. I’m basing my comments on having read CBC’s article, and on my own 30-plus years of charity accounting experience (mostly in the arts and culture space). I’m not qualified to evaluate BBPA – but I’ve seen enough comparable issues within enough organizations to know that the sector needs education on these matters – and that’s where I’m going with my comments.

Second, it’s important to affirm that indeed there’s a problem here.

“Related parties” include individuals such as directors who may be able to make or exercise influence over decisions. As such, their activities merit scrutiny. BBPA’s situation falls under three sets of regulations intended to enable that scrutiny:

• the Income Tax Act (federal) which governs the Charities Directorate and, by extension, T3010 reporting;

• Ontario’s Charities Accounting Act, which applies to charities based in Ontario; and

• the CPA Canada Handbook (CPA being Chartered Professional Accountants), which establishes principles for reporting financial information.

Under the Charities Accounting Act, directors can be reimbursed for out-of-pocket expenses, but cannot receive any other remuneration except under restrictive circumstances. As for the T3010, charities must answer the yes/no question, “Did the charity compensate any of its directors/trustees or like officials or persons not at arm’s length from the charity for services provided during the fiscal period (other than reimbursement for expenses)?”  Finally, the CPA Canada Handbook sets out standards for audit disclosure of related party transactions by not-for-profit organizations, of which registered charities are a subset.

Seems fairly cut and dried. So, what’s my rationale for suggesting that non-compliance might involve no deliberate wrongdoing?

I have long experience of charity leaders who possess limited financial expertise. In fairness, charity executives are hired for their dedication and proficiency in the charity’s field of mission, and directors are usually recruited to boards for both their dedication and the professional know-how they bring from their “day job.”

This can contribute to a situation where executive directors de-prioritize building their own finance and accounting skills in favour of recruiting trusted advisors – a bookkeeper, an auditor, and (hopefully) one or more board members with a strong finance background. (The ideal is often to recruit a volunteer CPA to the board of directors.)

In BBPA’s case, it seems possible to me that those two individuals secured the consulting gigs because they brought the optimal blend of expertise, familiarity with the association, dedication to the mission, and a fair price – and that the ensuing issues arose not from a desire to flout the rules, but from organization-wide unfamiliarity with the rules and the potential consequences of violating them.

Some CPAs and bookkeepers specialize in the sector, but many serve a handful of charities and focus most of their time on (more lucrative) business clients. Thus, an auditor, bookkeeper or finance-savvy board member might be at the top of their game in their core area of practice but be under-informed about the specifics of charity reporting in Canada.

An auditor might not have recognized the payments to board members. Catching them would have required making the connection between suppliers’ names as recorded in the books and the individual names on the board list – not necessarily obvious, especially if you’re not looking for the problem. And, if the auditor’s core expertise lay with business corporations, they might be less attuned to not-for-profit disclosure requirements and the risks that could arise from overlooking certain details.

Same applies to bookkeepers, with the additional thought that it’s typical for the government filing (in this case, the T3010) to be the auditor’s responsibility, meaning that a bookkeeper might be unfamiliar with the form and unable to back-stop disclosure deficiencies.

Add to this staff and board members who might acknowledge that they’re unfamiliar with charity regulation – but who might believe that they’ve covered this need by hiring experts. Of course, BBPA’s staff and board knew who they were contracting, but it’s quite imaginable that the connections weren’t flagged to the auditor or the bookkeeper.

As you can see, it’s conceivable that everyone involved believed that they were acting in the best interests of the organization, and that everything was in good hands. Sadly, the various players could all be looking at each other and trying to figure out who should have prevented this from happening.

The answer is that the board, as the governing body of the organization, is ultimately responsible for compliance. The board delegates operations to staff, and staff often hire expert service providers such as CPAs and bookkeepers. But, even if a deficiency arises at this lower level, the board must own it.

Ignorance of the law is no excuse for non-compliance. Given the plethora of regulations covering every aspect of business and charity affairs, how is this reasonable? The rationale for this foundational legal principle is that, if ignorance were an acceptable excuse, then wrongdoers could avoid liability by claiming that they were unaware of the rules. A companion concept states that the law must be properly disseminated – e.g., published and distributed – so that it is possible for all concerned to inform themselves.

So, it seems that BBPA has been caught out, fair and square. But is this a scandal, or a flaw in governance / management infrastructure that – if the truth were known – might not be all that uncommon across the charitable sector?

If my argument holds water – if I’ve presented a reasonable alternate view of the story – then perhaps the defenders of the sector should be discussing regulatory deficiencies and even ethical lapses as likely consequences of a situation where staff leaders hold sectoral expertise but are management generalists; where technical advisors (professionals plus those board members recruited for technical expertise) come up short on sectoral knowledge; and where, instead of that yin and yang adding up to a finely tuned whole, the matching deficiencies add up to disaster.

What do you think? Did you read this making mental additions to your charity’s governance to-do list? I’ll be very interested to read others’ comments!