Why Every Not-For-Profit Board Needs Financial Literacy

 

Why Every Not-for Profit (NFP) Board Needs Financial Literacy

Misconception Amongst Boards 

There is a common misconception that *boards can delegate financial governance to a single member (e.g. treasurer or business manager). Financial oversight is a legal obligation for all board members, not just one. 

It is irresponsible for a board to make decisions based solely on a single individual's input. 

*The term “Board” can also refer to directors and management. 

Legal Responsibility of All Board Members

What are the legal responsibilities of board members when it comes to financial literacy? 

Board members must be able to:

  • Read and understand financial statements such as:

    • The Balance Sheet (Statement of Financial Position)

    • The Profit & Loss Statement (Income Statement)

    • The Cash Flow Statement

  • Use financial reports to inform decisions, not just approve them.

  • Act in the best interests of the organisation and its beneficiaries.

  • Exercise reasonable care and diligence when reviewing financial information.

  • Ensure the organisation does not trade while insolvent.

  • Ensure resources are used properly and aligned with the organisation’s mission.

  • Monitor financial performance and align strategy with available resources.

Legal Case Example

In the legal case ASIC v Healy (Centro Case) was a landmark case where the directors of Centro Group were held liable for significant errors in the financial statements. The court held that 

Directors have a personal duty to “understand, focus upon and take responsibility for the contents of financial statements.”

The key message from this case was that even though Centro’s accounts were reviewed by both auditors and management, directors must have adequate financial literacy to assess financial statements. Solely relying on management and auditors is not sufficient to discharge them of their legal duties. 

Even though this case was for a “profit” organisation, the case is still applicable for not-for-profit boards. 

Key Takeaway 

This is not about turning every board member into an accountant or expecting board members to start reading financial statements like they are romance novels. It's about ensuring every board member can confidently read, question, and discuss financial information to make informed, responsible decisions.

Next in this series: “Accounting Made Simple: What Every Not-for-Profit Board Should Know”

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