This article was first published in the April 2012 China edition of Accounting and Business magazine
Many countries have undertaken major reforms of their laws on charities to protect the interests of donors and support charitable activities via a legal framework. Hong Kong, however, has so far neglected to comprehensively examine and update its approach to charities, an omission that is perhaps in the process of being rectified, albeit slowly.
The city’s 6,400 or so charities are split into two types: subvented and non-subvented. In total they raise about HK$10bn a year through charitable donations, and the subvented charities also receive a lump-sum grant from the government if they are successful in a competitive bidding process. Successive financial crises going back to 1997–98 have seen, if not cuts in funding, little or no expansion in the pot of money available for subvented charities. Consequently, they have upped their fundraising activities and compete fiercely with non-subvented ones for donations to keep them afloat.
Last June, the Law Reform Commission (LRC), through a charities subcommittee, embarked on a three-month public consultation following its proposal to set up a charities watchdog in the city and introduce a legal framework to oversee all charities in Hong Kong. The proposed charity commission would have the power to investigate mismanagement and remove trustees and directors, while also appointing additional ones to protect the assets and properties of the charity concerned. It would be able to register – and deregister – charities, grant licences and permits for their fundraising activities, maintain a publicly available list of charities and provide a public enquiry system.
Bernard Chan, chairman of the LRC’s charities subcommittee and vice chair of the Hong Kong Council of Social Service, says that the proposals provide the charity sector with a win-win situation. ‘The idea is to have more transparency in charities,’ he says. ‘This will build public trust and confidence and encourage more donations.’
Charity or NGO?
In Hong Kong, the word charity has long been used interchangeably with the terms not-for-profit organisation or non-governmental organisation (NGO). Accordingly, the subcommittee proposal recommends 13 areas under which a charity can operate. Among these are bodies involved in the prevention or relief of poverty; advancement of religion, culture, health, the environment and animal welfare; and the saving of lives. The proposal also recommends an additional requirement that, regardless of the ‘charitable’ category, its purpose must also be shown to benefit the public. This will remove the existing common law presumption that charitable purposes are by definition for the public’s benefit.
In its 325-page report, the subcommittee also lays out charities’ duties. Top of the list are requirements to provide annual reports and obtain permission to solicit donations in public places or hold a lottery to raise money. In practical terms, the recommended duties would see charities face new filing obligations including submitting annual activity reports and financial statements, and reporting potential conflicts of interest of their trustees and directors. Despite the additional administrative burden, it is hoped that the move would hold charities more accountable towards donors and accounting records.
To determine the level of oversight required, the subcommittee is recommending that registered charitable organisations with an annual income exceeding HK$500,000 should be required to file an auditor report and financial statements with the future charity commission. Those with an annual income of less than HK$500,000 should be required to file financial statements certified by the board of their charitable organisation. All reports and financial statements submitted to the proposed charity commission must be publicly accessible.
According to Ronald Yam, a partner at RSM Nelson Wheeler, existing limited statutory measures which regulate fundraising have been supplemented by non-mandatory practice guidelines from bodies, including the Hong Kong Institute of Certified Public Accountants, for those involved with charitable fundraising activities.
‘Any proposal should directly address the perceived weaknesses in the current system of regulating charitable fundraising in Hong Kong,’ Yam says. ‘Such activities should definitely be conducted in a more transparent and accountable manner, although any future regulatory measures should be no more than is necessary to improve the system.’
Yam, who also holds honorary treasurer positions with the Hong Kong Children’s Choir, Habitat for Humanity China and the Chinese YMCA of Hong Kong, does not want to unnecessarily overburden the dedicated charitable organisations and voluntary agencies. ‘Nor do I want to see excessive administration applied to the philanthropic public which provides their donations so generously,’ he says.
‘However, a detailed review of the system for regulating fundraising activities in a number of overseas jurisdictions has revealed that the nature and degree of oversight varies from jurisdiction to jurisdiction; the systems in England and Ireland are particularly instructive,’ Yam adds.
Thin end of the wedge
At the Agency for Volunteer Service (AVS), honorary treasurer and volunteer Victor Yung would like to see legislation that dictates that charities have to be registered through a centralised agency.
He agrees with the LRC subcommittee’s proposal that those earning a certain amount must provide audited accounts that can be inspected by the public, a process that is as yet voluntary.
‘Some large charities provide summarised financial information on their websites or through their publications to members or donors,’ he says. ‘But no one can access their financial information – specific reports about how much their administration or staff costs, for example.’
Founded in 1970, AVS is a not-for-profit organisation financed mainly by government funds and donations from the Community Chest of Hong Kong, the Hong Kong Jockey Club Charities Trust, the general public and private bodies. Its remit is to promote and develop sustainable volunteerism through mobilising and organising volunteer services, offering a referral service for those who wish to volunteer and supporting organisations requiring volunteers.
The agency has a board of directors, including Yung – an ACCA-qualified accountant. Under the AVS board sit various committees, including the finance and administration committee, which monitors the management accounts and internal controls of the organisation.
‘Accountants have to push their charitable organisations in Hong Kong to be more transparent and to prepare financial information like charities do in other countries,’ Yung says. ‘At AVS, we compare ourselves with the financial information prepared by charities in countries like the UK and we try to give more information to our members, donors and the public if possible.’
Like other charity boards and management teams, though, AVS’s members sometimes have to be convinced that Hong Kong’s charity sector is heading in the right direction in terms of calls for increased transparency and financial reporting. ‘By comparing ourselves with other well-known organisations and disclosing more, we become more transparent and donors will be more willing to donate,’ Yung says.
The LRC’s consultation paper received mixed reviews. Critics have raised concerns about the possible abuse of power by a centralised charity commission stacked with government appointees who are not representative of the public. Others have requested respect for the independence of charitable organisations, a restriction in powers to the proposed commission and the introduction of an appeal mechanism.
Charities subcommittee chairman Chan maintains that it is important to have an effective regulatory regime for charities in Hong Kong, both to build public trust and confidence and to promote good governance and management practice.
‘For the last couple of months I have interviewed a large number of people and we have a dichotomy. From the donors’ perspective they want to see more regulation but from the agency point of view they are concerned that there will be a duplication of regulations,’ Chan says.
‘We’re not talking here about charities only. We’re talking about churches, schools, welfare groups, environmental groups; there’s a whole spectrum of different stakeholders and each has their own concerns. Those who receive subvention from the government are already monitored in order to receive the money. But there are also those who don’t get much money from the government and there is very little regulation over them.
‘But it’s not a choice anymore. The donors are demanding more transparency and more accountability. So whether the charities like it or not, more scrutiny is going to happen. Whether there will be a law or not, charities will need to improve their governance. Is it going to happen on a voluntary basis or via some sort of legislation? We will see. Either way, even if we don’t get legislation, charities will need to find the means to be more accountable.’
The first step, Chan concludes, is for charities to make their financial accounts available for public access: ‘The industry needs to find a universal platform or standard through which they can be accountable to the public.’
The Situation Elsewhere
Singapore has an existing law on charities that is contained in the Charities Act (Chapter 37), as amended by the Charities (Amendment) Act 2007. The act provides for the registration and administration of charities and their affairs; the regulation of charities and institutions of a public character; the regulation of fundraising activities carried on in connection with charities and other institutions; and the conduct of fundraising appeals.
Meanwhile in Europe, in England and Wales the Charities Act 2006 defines what constitutes a charity and charitable purposes and establishes a regulatory framework. As well as defining the meanings of ‘charity’ and ‘charitable purposes’, the act creates a new Charity Commission as a corporate body, setting out its objectives, functions and duties, abolishing the existing charity commissioner and transferring its functions, rights and liabilities to the new body. The act also covers the registration of charities and introduces the new concept of the ‘charitable incorporated organisation’ which can be established with limited or unlimited liability, but only for charitable purposes. To facilitate good governance, provisions on removal, suspension, remuneration and disqualification of charity trustees are also included.
Following a review of charity law in Scotland (which has its own legal system), there is a new regulatory framework as enshrined in the Charities and Trustee Investment (Scotland) Act 2005. This involved the establishment of the Office of the Scottish Charity Regulator, an independent lead regulatory body; and shifting the regulatory responsibilities (including the responsibility to determine whether an applicant is charitable in nature) from the tax agency to a more independent body.
Many jurisdictions, including those mentioned above, also impose a legal obligation on the charity or its trustees to keep proper books of account. No surprise, then, that the charities subcommittee in Hong Kong recommends that trustees or directors of a registered charity should be under a statutory duty to keep proper accounting records that are sufficient to show and explain all its transactions, and suggests that such records should be retained for at least seven years.
Kate Watson, journalist