Home Accounting and Auditing King IV:  Friend or Foe to the Non-Profit Sector in South Africa

King IV:  Friend or Foe to the Non-Profit Sector in South Africa

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The issue of King IV in November 2016 initiated several debates in the media on issues such as mandatory audit form rotation and fair and responsible executive remuneration.  A lot has been said about the reduction in principles and the change from the Apply or Explain regime to the Apply and Explain regime.  However, very little has been said about the proportional application of the principles in the King IV Report, and the guidance provided in the application of the Report on sectors such as the Non-Profit sector in South Africa.  With almost 85 000 registered Non-Profit Organizations (NPO’s) in South Africa, according to the Department of Social Development Website, the application of the King IV principles in these organizations, becomes an important issue.

This article serves as an introductory discussion on the application of some of the principles contained in the King IV Report on NPO’s.  It is, however, not meant as a complete analysis and discussion of the application of the King IV Report on NPO’s and should not be read as such.

NPO’s can be registered as companies, charitable trusts, associations or clubs and can even include Non-Governmental Organizations (NGO’s) or Public Benefit Organizations (PBO’s).  The application of the King IV principles on these organizations is not reliant on their legal form, but rather on the fact that these organizations fulfil a social or environmental need.  It is further not required that the organization referred to in the Sector Supplement of the King IV Report, be registered in terms of the Non-Profit Organizations Act to be able to apply the principles contained therein.  Any organization that therefore is involved in social enterprise, can voluntarily apply the Sector Supplement in the King IV Report.

Ethical leadership and the governance of ethics of an organization remains important, especially so to NPO’s.  The King IV Sector Supplement provides some guidance on how to achieve this, by reminding the governing body of the NGO that they owe their fiduciary duties to the NPO itself and not to the constituents whom they represent.  Acting in the best interest of the NPO and its beneficiaries, should and avoiding personal conflict of interest, is therefore perhaps the most difficult principle to follow in the management of a NPO.  Conflicts of interest between a governing body member and the interest of the NPO’s should therefore be avoided as far as possible.  If the conflict is not avoidable, the conflict should be disclosed and proactively managed by the governing body.

Along with the management of conflict of interest, the governing body of a NPO should also govern the risks and opportunities associated with the NPO in order to balance the priorities of the organization and its financial sustainability.  To achieve this balance it is important that the governing body of the NPO clearly understand the business model of the organization.  This will enable the governing body to ensure its service program meets community needs effectively and efficiently; a reliable and sustainable support base was established; and ensuring procedures are in place for accountable handling of all the organization’s resources and programs[1].

Reporting on the resources and programs of the NPO’s becomes much more important to ensure the accountability of the governing body of the NPO.  The reporting of the activities, resources and sustainability are to follow the integrated thinking approach of King IV and should address aspects such as sustainability and transparency and should include aspects like the positive and negative impact the organization has on the environment, the evaluation of the organization’s, and governing body members’, performance and the assessment of the organizations policies, programs, effectiveness and economic impact.  It is even recommended that the integrated report of the NPO should include benchmark with other similar NPO’s.  The G4 Global Reporting Initiative’s Sector disclosures for NGO’s highlights the recommended disclosures for NPO’s[2].

As the central figure in the NPO, the governing body should consist of individuals with the correct balance of skills, experience, diversity and independence.  To assist the governing body in achieving this balance the governing body should have a formal process in place to assist them in identifying individuals to serve on the governing body.  It is recommended that the governing bodies also liaise with professional bodies, such as SAICA and SAIPA, to assist with the identification of the suitable members.  The size of the governing body is not prescribed by the King IV Report, but it is recommended that at least one skilled, knowledgeable and experienced individual on the governing body, fulfil the role of compliance manager or secretary.

In applying the principles set out in the King IV Report, even proportionally, the NPO could derive the following benefits:

  • “Added credibility and enhanced reputation.
  • Increased impact of activities and advocacy through stronger stakeholder relationships and more effective operational processes.
  • Access to funding, grants and loans on better terms.
  • The ability to leverage a wider pool of expertise for employment and volunteer work.
  • Better fraud prevention due to improved controls.
  • Business continuity arrangements that permit the NPO to operate under conditions of volatility, and to withstand and recover from acute shocks.
  • Leadership continuity through succession planning.”

The source for this article is the Sector Supplement for Non-Profit Organizations as contained in the King IV Report.

1 Codes of Good Practice for South African NPO’s:  Available from: http://www.dsd.gov.za/npo/index.php?option=com_docman&task=cat_view&Itemid=39&gid=83&orderby=dmdate_published.

[2] Available from: https://www.globalreporting.org/information/g4/sector-guidance/sector-guidance/ngo/Pages/default.aspx.

Ms Cornelie Crous CA(SA) is a Senior Lecturer in Auditing, School of Accountancy, University of the Free State