Importance of Compliance &
Good Governance in NPOs
Dr Sibichen K Mathew IRS
www.sibichen.in
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• Why NPOs?
• Attributes of NPOs
• What / why is the preferential treatment?
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Why Auditors should be cautious?
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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?
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3 Interconnected pillars
• Effective Managerial governance
• Efficient Audit and Tax compliance
• Ethical compliance
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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
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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
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Sl.No
Particulars
Society
Trust
Non-Profit Companies
1
Incorporation
Simple
Simple
Highly Procedural
2
Membership
Minimum 7
Minimum 2 (Advisable)
Minimum2
3
Annual Returns Under the Act
Mandatory
Not required except in states like Mandatory
Maharashtra, Gujarat etc
4
Amendments
Easy
Mostly only with civil court approval
Procedural
5
Management
As per Act & by Laws
As per Trust Deed
As per Act and By Laws
6
Meetings
Mandatory
As provided in Trust Deed
Mandatory
7
Governance System
Democratic
As provided in Trust Deed
Democratic
8
Election of the Board Members
Any member can be elected
Does not arise/ As per Trust Deed
Anybody can be elected.
9
Govt Interface
High under state Laws
Nil except in Maharashtra, Gujarat etc
NIL
10
Foreign Contribution Regulation Act
Same
Same
Same
11
Income Tax Act, 1961 and filing
Same
Same
Same
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(Thanks to CA John Mathew for
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.
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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.
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Non Profit Company
• Formation, management, amendment under
Central Act.
• Procedural compliances with professionalism
• No local state Government interference
generally.
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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
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• 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……………………….
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• 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)
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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
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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).
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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)
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• 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.
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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
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• Approval u/s 80G(5)
• Notification u/s 10 23C vi
• Section 35 and Section 10(21) . Research
Association
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• 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)
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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
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Proper planning before audits
Brain storming sessions
Competent staff
Create a value for themselves
Give more time by the main auditor. Avoid
over delegation
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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-forProfit Organisations (ICAI)
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Thank You
sibi5555@gmail.com
www.sibichen.in
Google: sibi-cyberdiary
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