1. Importance of Compliance & Good Governance in NPOs Dr Sibichen K Mathew IRS www.sibichen.in Sibichen-ICAI-NPO-1-8-14

2. Why NPOs? Attributes of NPOs What / why is the preferential treatment? Sibichen-ICAI-NPO-1-8-14

3. Why Auditors should be cautious? Why scams? Fraudulent NPOs The ‘briefcase’ NPOs CSR attraction The Delhi high court has called for toughening of licensing norms for NGOs observing that 99% of them are "fraud" and "merely money making devices". (Justice Pradeep Nandrajog) Audit failures: Why? Regulatory failure? Sibichen-ICAI-NPO-1-8-14

4. 3 Interconnected pillars Effective Managerial governance Efficient Audit and Tax compliance Ethical compliance Sibichen-ICAI-NPO-1-8-14

5. The need for professional governance in NPO sector The issues of ‘Independence’ currently facing in non-profit sector -over dependence on the clients -Link of NPO to profit making companies in the group and audit risks -financial transactions with the clients -self interest situations -over dependence on non-audit work -lack of protection -general inaction on their reports Sibichen-ICAI-NPO-1-8-14

6. Auditor worries Loss of reputation, Out of business, Damages Due to -failure to gather appropriate evidences -Deliberately misled by the Trustees or internal auditors -Technical incompetence -Poor judgment of facts -Draws incorrect conclusions Sibichen-ICAI-NPO-1-8-14

7. Sl.NoParticularsSocietyTrustNon-Profit Companies 1IncorporationSimple Highly Procedural 2MembershipMinimum 7Minimum 2 (Advisable)Minimum2 3Annual Returns Under the ActMandatoryNot required except in states like Maharashtra, Gujarat etc Mandatory 4AmendmentsEasyMostly only with civil court approvalProcedural 5ManagementAs per Act & by LawsAs per Trust DeedAs per Act and By Laws 6MeetingsMandatoryAs provided in Trust DeedMandatory 7Governance SystemDemocraticAs provided in Trust DeedDemocratic 8Election of the Board MembersAny member can be electedDoes not arise/ As per Trust DeedAnybody can be elected. 9Govt InterfaceHigh under state LawsNil except in Maharashtra, Gujarat etcNIL 10Foreign Contribution Regulation ActSame 11Income Tax Act, 1961 and filingSame (Thanks to CA John Mathew for compilation) Sibichen-ICAI-NPO-1-8-14

8. Areas of compliance in nutshell Registered Societies Societies Registration Act, 1860 and Certain State Acts. An Act for registration of literary, scientific and charitable societies. Governed by the Act and MOA and Byelaws. MOA and Byelaws to be within the Act. Maintenance of Minutes of Meeting, List of members, etc., To be formed by at least 7 members under the provisions of the Central / State Act. General Body and Committee meetings. Annual Returns / Statements to be filed under the State Act. Management provisions as per the Act and more democratic. Verification of records by state authority. Sibichen-ICAI-NPO-1-8-14

9. Public Charitable Trust By a Trust Deed. Essentials – Author, beneficiary, Trust Property, divesting of ownership and administration. Amendments in deed subject to restrictions. Annual Return not required generally. Management as per Trust Deed. Sibichen-ICAI-NPO-1-8-14

10. Non Profit Company Formation, management, amendment under Central Act. Procedural compliances with professionalism No local state Government interference generally. Sibichen-ICAI-NPO-1-8-14

11. Income Tax – Prior to AY 2009-10 After 1-4-2009? Benefiting others rather than oneself Direct relief to poor; not indirect Objects should be specific Exemptions u/s 11 and u/s 12 based on registration u/s 12A 12A is prospective If already existed in earlier years, accounts of at least 3 years Sibichen-ICAI-NPO-1-8-14

12. Satisfaction of the Director (Exemption) on Genuineness of activities and objects of Trust 6 months from the end of the month of application Audit report of the CA Legal entity Written instrument of creation Objects-charitable or religious Income and assets for objects No part of income………………………. Sibichen-ICAI-NPO-1-8-14

13. In the case of dissolution………………for objects Filing of return mandatory if there is taxable income before application of 11&12 S 115BBC – Anonymous donations- wholly religious-exempt partly religious - with medical/educational instn: 30% tax, if they (donation to medical/educational instn) are more than 5% or 1 lakh (higher) Wholly charitable/ednl- taxable- if more than 5% or 1 lakh (higher) Sibichen-ICAI-NPO-1-8-14

14. Lax financial management FCRA, Foreign donations Money laundering Recent investigations: RAW and IB Aware that reports go to FIU (A) All cash transactions of the value of,more than Rs 10 lakhs or its equivalent in F/c (B) All series of cash transactions integrally connected to each other which have been valued below Rs 10 lakhs or its equivalent in f/c where such series of transactions have taken place within a month. ( C) All cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine and where forgery of any valuable security has taken place (D) All suspicious transactions whether or not made in cash Sibichen-ICAI-NPO-1-8-14

15. Auditors need to be watchdog to protect the sector from misuse: by terrorist organisations posing as legitimate entities; through the exploitation of legitimate entities as conduits for terrorism financing; and by concealing or masking the clandestine diversion of funds intended for legitimate purposes to terrorist organisations (FATF 2004). Sibichen-ICAI-NPO-1-8-14

16. Misuses in NPOs Misuse of funding funds may be collected in the name of a legitimate NPO but disbursed for terrorist rather than altruistic means. to launder money or provide legitimate means for the transmission of funds between multiple locations. Finally, funds may be misused by the recipients themselves. In any of these scenarios, the NPO may or may not be complicit in or aware of the abuse being committed. Misuse of assets Assets such as vehicles and property could be used to transport or house operatives, money and weapons, and provide relatively safe places where members can meet. Misuse of name and status An NPO may provide financial support to an organisation that provides humanitarian aid, for example, but that organisation may also provide succour to terrorist activities. An NPO may raise funds for a particular cause but have those funds dispensed or support provided through a terrorist group. (Detailed analysis can be seen in ‘Misuse of the non-profit sector for money laundering and terrorism financing’ by Samantha Bricknell) Sibichen-ICAI-NPO-1-8-14

17. Misuse of the notion of charitable status Criminal or terrorist entities may elect to establish a sham NPO (in this case, a charity) but one which is registered and engages in requisite regulatory requirements. The purpose of the NPO is ostensibly to collect and distribute charitable giving but it is in reality a front for the laundering of money, appropriation of terrorism funds or for the rallying support for terrorist activities. Sham NPOs: incorporate under state law; apply for tax-exempt status as a charity or other type of NPO; undertake fundraising activities; open domestic bank accounts into which proceeds and donations are deposited; and transfer funds to overseas financial institutions, diverting all or some of the funds to terrorist activity. Sibichen-ICAI-NPO-1-8-14

18. Auditors need to go to the detail How funds (at least 85%) applied? No exemption if -income used for purely religious activity and not public -Benefits interested parties -Invested in other modes -trade/commerce/ business Sibichen-ICAI-NPO-1-8-14

19. Approval u/s 80G(5) Notification u/s 10 23C vi Section 35 and Section 10(21). Research Association Sibichen-ICAI-NPO-1-8-14

20. Three key duties of Finance Professionals -Acquire and update highly developed, technical body of knowledge acquired over years -A high degree of discipline and self-regulation -A commitment to public service Fiduciary capacity Professionals are agents for not only the client but of state and society Moral Hazard among professionals (I need not be careful, let others!) and Adverse selection (may not be the best) Sibichen-ICAI-NPO-1-8-14

21. Proactive role of CAs The investigative role Apparent is not real Go beyond the numbers Think like a fraudster Third party verification Alert on new agreements., contracts, transactions which radically changed the results Demonstration of technical competence Sibichen-ICAI-NPO-1-8-14

22. Proper planning before audits Brain storming sessions Competent staff Create a value for themselves Give more time by the main auditor. Avoid over delegation Sibichen-ICAI-NPO-1-8-14

23. Please read GUIDANCE NOTE ON AUDIT OF PUBLIC CHARITABLE INSTITUTIONS UNDER THE INCOME-TAX ACT, 1961 (ICAI) Tax Payers Information Series – 37 Assessment of Charitable Trusts and Institutions (ITD) Technical Guide on Accounting for Not-for- Profit Organisations (ICAI) Sibichen-ICAI-NPO-1-8-14

24. Thank You sibi5555@gmail.com www.sibichen.in Google: sibi-cyberdiary Sibichen-ICAI-NPO-1-8-14