Welcome to the first of the 10 part series of training videos created by Creative Australia and designed for non-executive directors, arts and cultural organisations.

The purpose of the series is to assist directors to understand their fiduciary responsibilities with respect to financial management and reporting, and to assist directors to strengthen their skills in reading and interpreting financial information they receive.

The information advice in this series is general in nature and is targeted at for purpose arts organisations, which are registered with the Australian Charities and Not-for-profits Commission: the ACNC.

Regardless of the specific type of organisation you are working with, be it an incorporated association, a company limited by guarantee, or if it has deductible gift recipient DGR status, the key learnings in this series will be relevant to you.

We recommend that the videos are viewed in the order we've presented them in.

In particular, it is important that you have viewed videos three, four, and five before you view video six.

Should you have specific questions regarding the unique circumstances of your organisation, you're encouraged to seek further advice.

This first part is an introduction to this series, and we'll discuss the role of the board in the financial management of the organisation.

Part two is an introduction to financial reporting, and we will discuss the differences between financial accounting and management accounting.

The three primary financial statements being the income statement, balance sheet and cash flow statement, as well as the foundational accounting concept of accrual versus cash accounting.

Parts three, four, and five focus on the income statement, balance sheet, and cash flow statement respectively.

We will discuss the purpose of each statement, what tells you as a director, provide tips on how to read and interpret the information and suggest questions a director may want to ask.

Part six recaps the purposes of each of the financial statements and discusses how they relate to each other and how together they provide a complete picture of the financial health of the organisation.

It covers questions a director may want to ask about the overall financial position and provides some helpful financial ratios and benchmarks.

Part seven focuses on internal financial reporting to the board and what information the board should expect to receive from management, and when.

It also discusses the budget setting process and considerations a director may have when reviewing the budget.

Part eight will review the mandatory external financial reporting obligations the organisation has, including the preparation and lodgement of the financial reports with the ACNC and the critical role the directors have in approving these reports. It also explains what is an external audit and the types of audit opinions that may be provided.

Part nine covers the role and responsibilities of the audit and risk committee, or other similar subcommittees of the board and how they relate to the board.

It also discusses the board's role in ensuring the organisation has an effective system for managing risks and an adequate and effective system of internal controls.

The final part in this series, part 10, addresses the critical issue of insolvency.

Insolvency is where the organisation is unable to pay its obligations as and when they fall due. This part will discuss the duty of directors regarding insolvency, the potential consequences for directors of trading while insolvent, the key warning signs and suggestion as to when to seek professional advice.

As an introduction to this series, it is important to clarify the complimentary roles of the board versus management regarding financial management.

In short, the board of directors is responsible for governance and oversight while management is responsible for financial operations and execution.

The ACNC Act imposes various duties on directors or in the language used by the ACNC, Responsible People.

These duties include: the duty to act with reasonable care and diligence, the duty to ensure the financial affairs of the organisation are managed responsibly and the duty to not allow the organisation to operate while it is insolvent.

In practise, these duties require the directors to do the following things: To review and approve the financial statements that are lodged annually with the ACNC, to understand the financial reports, be financially literate and able to read and interpret the information.

Directors should ask informed questions of management and challenge the assumptions management have made when preparing the reports.

Directors must ensure the organisation complies with all applicable laws and regulations such as the ACNC Act, Australian Accounting Standards and Funding agreements.

Directors must also monitor the financial health and solvency of the organisation through regular reviews, budgets, financial reports, and forecasts.

Directors are also responsible for the appointment of the external auditors where required and ensuring that the auditor is independent.

The overriding responsibility of the directors is to establish a culture within the organisation of transparency, accountability, and compliance.

They should set the tone from the top and consistently emphasise the importance of sound financial stewardship.

They should create a culture where directors are encouraged to ask questions and to develop an open, constructive, and no surprises relationship with the chief executive and the management team.

Directors should set clear expectations of the management team regarding board reporting and assure a culture whereby every strategic decision taken includes consideration of the financial implications.

Ultimately, it is the board of directors who will be held accountable by stakeholders for the financial stewardship and success of the organisation.

Welcome to part two in this series. This part contains an introduction to Financial Reporting, and we will cover three areas. First, we will explain the difference between financial accounting and management accounting and the difference between financial statements and management accounts. Second, we will introduce the three primary financial statements being the income statement, the balance sheet, and the cash cashflow statement, and discuss the various alternative names by which they are referred to. And finally, we will explain the foundational accounting concept of accrual accounting, and the impact of this on financial reporting. 

To begin, as a director, you should expect to receive financial reports and updates from the management team throughout the year. It is helpful for directors to understand the different types of financial reports they will receive and their purpose. We will start by explaining the difference between financial accounting and management accounting, and then the difference between financial statements and management accounts. 

Financial accounting is the process of recording and summarising your organisation's financial transactions and reporting them in financial statements. These financial statements are prepared for external stakeholders, notably regulators such as the ACNC, shareholders or members of your organisation, government or private funding bodies, corporate sponsors, donors, creditors, and the general public. On the other hand, management accounting is the process of analysing and interpreting financial information and reporting them in management accounts. The audience for management accounts are the key internal stakeholders, being the board of directors and the management team. 

The purpose of external financial statements is to provide information about your organisation's financial position and performance in a way that is reliable, consistent, and transparent. The statements must be in a form that facilitates the easy comparison of your organisation's information, with that of other organisations, they're intended to assist external stakeholders to make informed decisions about your organisation. 

By contrast, the purpose of internal management accounts is to assist the directors and management team to monitor the organisation's operational and financial performance and to assist forward planning, decision-making and risk management. While external financial statements are prepared annually, internal management accounts are usually prepared monthly or quarterly, but can be weekly or ad hoc if required. Directors will typically see external financial statements once a year after the close of the organisation's financial year end, allowing time for the management team to prepare them and the auditors to audit them, where applicable. Internal management accounts are typically distributed to the board throughout the year with board papers ahead of scheduled board meetings. 

As we've discussed, a key purpose of external financial statements is to facilitate the easy comparison of information between entities. Consequently, the way the information is presented is standardised and the form and content of external financial statements must strictly follow the legal requirements in the ACNC Act, which includes compliance with Australian accounting standards. No variation from these requirements is permitted. You must follow the rules. 

External financial statements include the three primary financial statements, a statement of changes in equity, notes to the financial statements, and a responsible entity's declaration. We will discuss these further in later parts in this series. As these external financial statements are lodged annually with the ACNC, they are publicly and freely available via the ACNC website, and you can obtain examples of external financial statements from other organisations there. 

By comparison, there are no legal requirements as to the form and content of internal management accounts, and therefore it's up to the board to make clear to the management team the information that they require. Typically, internal management accounts contain a combination of financial and non-financial information, together with commentaries on variances and performance by the chief executive officer, the CEO, or the finance manager. They may include actual performance of the month and year to date, comparison to both the budget and the equivalent period in the previous year. They should also include a balance sheet and a cashflow statement. This is referred to as "look back" information. 

In addition to the "look back" information, they should ideally also include "look forward" information such as a four year forecast for the profit and loss, together with a cash flow forecast. If the organisation has a strategic plan, the internal management accounts may also include a dashboard for tracking key performance indicators such as audience attendance and numbers of donors, et cetera. Internal management accounts are confidential and therefore may contain a lot of granular operational and financial information. Though not lodged with a regulator, some public or private funding bodies may ask for summarised management information periodically as a condition of the funding being provided. 

We now turn to the three primary financial statements. The first of these is the income statement, which is sometimes called the statement of profit and loss, or the statement of profit and loss and other comprehensive income or the P and L for short. This shows the revenue and expenses and surplus or deficit over a specific period, for example, the financial year. The second statement is the balance sheet, which is sometimes called a statement of financial position or statement of assets and liabilities. This shows the organisation's assets, liabilities, and equity at a specific time. For example, the end of the financial year. The final statement is the cash flow statement, sometimes known as the statement of cash flows. This shows the inflows and outflows of cash during a period, for example, the financial year and the cash balance at the end of that period. 

An example of the three primary financial statements of a fictitious entity, Creative Arts Limited can be downloaded from the link in this video, and they will each be discussed in more detail in parts three, four, and five, later in the series. We now turn to a discussion of a key accounting concept: Accrual accounting. 

Accrual accounting is where income or expenses are recognised and recorded when they are earned or incurred, not when the cash is received or paid. For example, Creative Arts Limited has programmes printed and delivered on 29 June. The printer provides their invoice with the delivery, and it is paid by the company's finance team two weeks later. In this example, the expense will be recorded in June in the income statement, even though the payment was not made until July. 

The income statement and balance sheet are prepared on an accruals basis, but the cash flow statement is prepared on a cash basis. In other words, there's a timing difference between when the expense is recorded in the income statement versus when it is recorded in the cashflow statement. In the example we just discussed, as Creative Arts Limited has a 30 June end of financial year, it means that the printing expense would be recorded in the income statement in one financial year and recorded in the following year in the cashflow statement. 

To summarise the key learnings from this part of the series: First, financial statements are prepared annually for regulators and other external stakeholders. The form and content of financial statements must follow the requirements of the ACNC Act, which includes compliance with Australian accounting standards. You must follow the rules. By contrast, management accounts are prepared throughout the year and are used by the board and management to monitor the organisation's operational and financial performance and to assist forward planning, decision making and risk management. It's up to the board what information the management team includes in the management accounts. 

Second, the three primary financial statements are the income statement, the balance sheet, and the cashflow statement, and each of these will be discussed in depth in future parts in this series. Finally, accrual accounting is where income or expenses are recognised and recorded when they are earned or incurred, not when the cash is received or paid. The income statement and balance sheet are prepared on an accruals basis, but the cashflow statement is prepared on a cash basis.

Welcome to part three in this series. In this third part of the series, we will be focused on the income statement and we'll be covering the following three areas. First, what is the purpose of an income statement and what does it show? Second, we'll discuss the key components of the income statement being revenue, expenses and net surplus or deficit. And finally, we'll consider some useful questions a director should consider when reviewing an income statement. 

We'll be referring to an example income statement for a fictitious company, Creative Arts Limited, and you can download a copy from the link in the video description. It will be helpful for you to have a copy of it available as we go through this session. 

In part two of this series, we discuss the difference between financial statements and management accounts. The example income statement for Creative Arts Limited is in the financial statements format. You may know an income statement by other names such as a statement of profit or loss, a statement of profit and loss, and other comprehensive income or a P and L, for short. They're all referring to the same document. 

So what is the purpose of an income statement and what does it show? The purpose of an income statement is to explain how the organisation has performed during a period of time. It shows, in summary how much of the different types of revenue have been earned and the different types of expenses that have been incurred. It will also show you whether the organisation has made a surplus or a deficit. 

A surplus or profit is when revenue is greater than expenses, and a deficit or loss is where expenses are greater than revenue. A review of the expenses will show how the organisation is using its resources to deliver its purpose. By reviewing income statements over multiple periods, you're able to identify trends and assess whether the operations of the organisation are financially sustainable. 

What is revenue? Revenue or income is the amount of money the organisation has earned during the period. Referring to our example income statement, total revenue is $1,185,800. In the arts and cultural sector, common types of revenue include ticket sales, government grants, corporate sponsorships, donations, membership fees, and interest in other income from investments 

An income statement is prepared on an accrual basis, and the Australian accounting standards have rules around when revenue is recognised in the income statement. There may be a difference between when income is received in cash and deposited into the company's bank account and when it is recognised as income, in the income statement. Some types of income will be earned without any further obligations on the organisation to do or deliver anything. An example of this type would be a regular donation. This income is recognised when received. 

Other types of income may be subject to the requirement for the organisation to do or deliver certain things. For example, an audience member may buy a subscription for a series of performances and pay for the entire subscription upfront. In this case, the organisation recognises the revenue as each performance is completed rather than upfront when the subscriber pays for the subscription. 

Another example is a government grant. The grant may be received in a full upfront, but is conditional upon the organisation achieving the deliverables or milestones as set out in the funding agreement. In this case, the grant income would be recognised as each deliverable is achieved. If the organisation has received income in cash and has not yet performed the service or obligation necessary to recognise the income, it's treated in the financial statements as unearned income, or revenue received in advance. 

Revenue received in advance will be recorded as a current liability in the balance sheet until the service or obligation is performed. Referring to our example balance sheet, Creative Arts Limited has revenue received in advance of $178,700, which is included in current liabilities. 

What are expenses and expense is a cost incurred while carrying out the organisation's activities. Referring to our example income statement, total expenses are $1,157,000. In the creative arts sector, common types of expenses include staff wages and artist fees, production, touring, and revenue costs, marketing, fundraising, administration, depreciation, and amortisation, and financing or interest expense. 

Under Australian accounting standards, expenses are recognised in income statement when they're incurred, which may be different to when they are paid. For example, let's assume Creative Arts Limited has programmes printed and delivered on 29 June. The printer provides their invoice with the delivery and it is paid by the company's finance team two weeks later. 

In this example, the expense we recorded in June in the income statement, even though the payment was not made until July, if certain expenses have been incurred but not yet paid for, this future obligation to pay will be recognised in the current section of the balance sheet as a trade payable, which is an amount due to a supplier. Referring to our example, balance sheet trade and other payables is $24,800. 

Subtracting total expenses from total revenue gives a surplus if it's a positive number or a deficit if it's a negative number. Referring to our example income statement, the surplus is $28,800. The surplus or deficit for a particular year is added or subtracted from the accumulation of all surpluses and deficits since the organisation began and is shown in the equity section of the balance sheet as accumulated surplus. Referring to our example balance sheet, the accumulated surplus is $354,100. 

A reminder that the example financial statement we've been referring to is in the financial statements format. The format of this income statement must follow the rules set out in the relevant legislation such as the ACNC Act and the Australian Accounting Standards. 

In the internal management accounts, the directors and management have the flexibility to provide the information in the format they want, and in as much granular detail as they need. It would also be usual for the income statement in the management accounts to show a comparison of the actual revenue and expenses with the budgeted numbers. 

If I was a director of our example company, Creative Arts Limited, when reviewing the income statement, I would ask questions to understand what types of revenue the organisation has and earned, what types of expenses have been incurred, and whether the revenue and expenses have been recognised on an accrual basis and in accordance with Australian accounting standards. 

To summarise the key learnings from this part of the series: First, an income statement shows how the organisation has performed financially during the period. Second, the income statement shows revenue or income earned and expenses incurred during the period and whether the organisation has made a surplus or a deficit. 

Finally, when reviewing an income statement, it is important that a director understands the types of revenues and expenses the organisation has earned or incurred, whether they have been correctly recorded on an accruals basis and in accordance with Australian accounting standards. Part six of this series will further explore how a director can read and interpret the income statement and what additional questions they may ask.

Welcome to part four in this series. 

In this fourth part of the series, we will be focused on the balance sheet and we'll be covering the following three areas. First, what does the balance sheet show and what is its purpose? Second, we'll discuss the key components of the balance sheet, the accounting equation, and why a balance sheet balances. Finally, we'll consider some useful questions a director should consider when reviewing a balance sheet. 

We'll be referring to an example income statement for a fictitious company, Creative Arts Limited, and you can download a copy from the link in the video description. It will be helpful for you to have a copy of it available as we go through this session. 

A balance sheet can also be called by other names, including a statement of financial position or a statement of assets and liabilities. But fundamentally, they all refer to the same document. 

So what does a balance sheet show? A balance sheet shows the organisation's assets, liabilities, and equity, sometimes called an accumulated surplus or reserves, at a specific point in time. For example, the end of the financial year. 

And what is the purpose of a balance sheet? A balance sheet is a snapshot of the financial position of the organisation at a point in time. It also shows how assets owned or controlled by the organisation have been paid for, and we will discuss this further during the session. 

What is an asset? An asset is a resource that is owned or controlled by an organisation and which is expected to provide a future benefit. Examples include cash, office, equipment, and property. 

What is a liability? A liability is an obligation to transfer a resource such as cash to settle an amount owed at some point in the future. Examples include trade payables, which is monies owed to suppliers, employee leave liabilities, and lease liabilities. 

Equity, sometimes called an accumulated surplus or reserves, represents what is left over in the organisation's assets once all liabilities are deducted. In other words, it represents the net resources accumulated over time and available to advance the organsation's purpose now and in the future. 

So why is it called a balance sheet? It's called a balance sheet because it balances. The accounting equation is assets minus liabilities equals equity. Referring to Creative Arts Limited balance sheet, total assets have $842,700 minus total liabilities of $472,200 equals equity of $370,500. 

Let's take a closer look at assets. On a balance sheet, assets are categorised as either current assets or non-current assets. Creative Arts Limited has total current assets of $239,400 and total non-current assets of $603,300, which add together to give total assets of $842,700. 

A current asset is an asset that is expected to be used or converted into cash within the next 12 months. A non-current asset is an asset that is expected to last greater than 12 months. 

As a director, when it comes to assets, there are two general questions you should consider. The first question is, do all the assets actually exist and are all the assets owned or controlled by the organisation? As an example, if we own lighting and sound equipment, do we have the processes in place to periodically count or inspect the equipment and assure we still own and control them? 

The second question is, how have each of the assets been valued and have they been valued in accordance with the requirements of the Australian Accounting Standards? As directors, we have duty to understand how the management team has valued the assets and be prepared to ask questions and challenge the assumptions management have made. 

Turning now to liabilities, just as assets are split into current and non-current categories, the same split is required for liabilities. Creative Arts Limited has total current liabilities of $260,700 and total non-current liabilities of $211,500, which add together to give total liabilities of $472,200. 

A current liability is an obligation due to be paid or settled in the next 12 months. Examples include: Trade payables, in other words, amounts owed to suppliers, unpaid invoices or employee leave liabilities. A non-current liability is an obligation that is not due to be paid or settled for at least 12 months. Examples include a lease liability, which is money due to be paid under a lease greater than one year in the future. 

As a director, when it comes to liabilities, there are two general questions we should consider. First, have all liabilities been identified? For example, do we have adequate procedures and internal controls to ensure that all amounts due to suppliers have been recorded? Second, how have each of the liabilities been valued and have they been valued in accordance with the requirements of the Australian Accounting Standards? 

The total value of all assets less the total value of liabilities, gives the net assets of the organisation. Creative Arts Limited total assets are $842,700, and its total liabilities are $472,200, giving net assets of $370,500. This is equal to the total equity for the company. 

In an arts organisation, the equity section of the balance sheet is sometimes called accumulated surpluses or reserves, and equity is usually built in one of more of the following three ways. 

First, depending on the type of organisation, members or shareholders may make an initial contribution of funds. Creative Arts Limited members have contributed $1,500, which is shown on the balance sheet as issued capital. Second, organisations may build an accumulated surplus or deficit over the life of the organisation. This is the total of all revenue, minus all expenses over time. Creative Arts Limited has an accumulated surplus of $354,100. 

And third, we have reserves. There are different types of reserves, but a common one is an asset revaluation reserve. This is where the organisation recognises the increase in the fair market values of an asset. For Creative Arts Limited, the reserve here relates to the increase in value of financial assets, which are a small portfolio of financial investments. 

In arts organisations, it is common for certain grants or donations to be made on a strict condition that they only be used for a specified purpose, for example, to buy a building, commission a new work, or fund a fellowship. In these cases, the funds are not available to be used for other purposes. 

It is best practise to recognise these funds in a separate reserve so that directors and other stakeholders are aware of what funds have restrictions as to what they can be used for. Generally, these are called restricted reserves, where the general purpose reserves are called unrestricted reserves. 

To summarise the key learnings from this part of the series: First, a balance sheet is a snapshot of the financial position of the organisation and its assets, liabilities, and equity at a specific point in time. Second, the accounting equation is assets minus liabilities equals equity. Finally, we discussed some key questions directors should consider when reviewing a balance sheet. 

Part six of this series will further explore how directors can read and interpret the balance sheet and what additional questions we should ask. 

Welcome to part five in this series. 

In this fifth part of the series, we will be focused on the cashflow statement and we'll be covering the following three areas. First, what is the purpose of a cashflow statement and what does it show? Second, we'll examine the key components of the cashflow statement. Finally, we'll consider some things a director should consider when reviewing a cashflow statement. 

We'll be referring to an example cashflow statement for a fictitious company, Creative Arts Limited, and you can download a copy from the link in the video description. It will be helpful for you to have a copy of it available as we go through this session. 

To begin, what is a cashflow statement and what does it show? A cashflow statement, sometimes called a statement of cash flows, shows the inflows and outflows of cash during a period. For example, the financial year, it shows where the cash came from and how it was spent. It plays a critical role in helping directors to understand whether their organisation can generate enough cash to fund its activities and stay solvent. 

All of the cash inflows and outflows during the period are grouped into three categories. Cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. 

First group is cash flows from operating activities. This includes all of the cash inflows and outflows relating to the day-to-day running of the organisation. In the arts and cultural sector, typical operating cash inflows would include ticket sales, donations, corporate sponsorships, government grants, and interest income. Typical operating outflows would include wage payments to employees and artists, payments to suppliers for organisational expenses such as marketing, venue, hire, travel, and insurances. 

The total of all of these operating inflows and outflows gives the net cashflow provided by operating activities. Referring to Creative Arts Limited's cashflow statement, the net cashflow provided by operating activities is $156,600. 

The net cashflow provided by operating activities is one of the most important pieces of information in the financial statements. It effectively represents the net cash surplus or deficit the organisation has achieved for the year from its core operations. 

You may then ask if the net cash flow provided by operating activities represents the net cash surplus or deficit, why isn't it the same number as the net surplus or deficit in the income statement? There are two reasons. Firstly, timing. The income statement recognises income and expenses on an accruals basis. That is when they are earned or incurred in accordance with accounting standards. 

On the other hand, income and expenses are recognised in the cash flow statement on a cash basis. That is when the cash is received or paid. For example, let's assume Creative Arts Limited has programmes printed and delivered on 29 June. The printer provides their invoice with the delivery and is paid by the company's finance team two weeks later. 

In this example, the expense will be recorded in June in the income statement and in July in the cashflow statement. As Creative Arts Limited has a 30 June end of financial year, it would mean that the printing expense would be recorded in the income statement in one year and recorded in the following year in the cashflow statement. 

The second reason for the difference is non-cash expenses. The income statement will include certain expenses such as depreciation, that a non-cash expense and therefore will never appear in the cash flow statement. As the income statement includes non-cash expenses and the cash flow statement doesn't, the net cash flow provided by operating activities in the cash flow statement is typically higher than the net surplus in the income statement. 

This is a useful health check for directors to consider. For example, in Creative Arts Limited, net cash provided by operating activities of $156,600 is higher than the net surplus of $28,800. 

The second group of cash flows is cash flows from investing activities. This shows cash outflows or inflows from buying or selling non-current assets such as property, plant and equipment or financial investments. A reminder that non-current assets are assets expected to last longer than 12 months. 

Referring to Creative Arts Limited's cash flow statement, the net cash used in investing activities is negative $275,100. A negative number indicates that there is a net cash outflow. This means the organisation is investing in non-current assets. If the number was positive, it would mean that the company is selling non-current assets. 

The third group is cash flows from financing activities. Cash flows in this section relate to how the organisation is funded and may include contributions of capital from members or shareholders or loans received or repaid or lease payments made. Referring to the Creative Arts Limited's Cash Flow statement, the net cash used in financing activities is negative $27,300 and represents amounts paid for lease. 

If you add together the net cash flows from operating activities, investing activities, and financing activities, you get the total increase or decrease in cash during the period. Referring to the Creative Arts Limited's cash flow statement, the sum of the three cash flow categories is negative $145,800, and this is shown on the line net change in cash and cash equivalences. 

If you add the net change in cash figure to the cash balance at the beginning of the period, you arrive at the cash balance at the end of the period. For Creative Arts Limited, the cash balance at the beginning of the year is $344,000. Adding the net change in cash to this gives the cash balance at the end of the year of $198,200. 

Creative Arts Limited's balance sheet shows two columns. The first column shows the balances as at 30 June, 2025, and the second column shows the balances as at 30 June, 2024. These are the balances at the end of the previous financial year. 

The balance sheet shows in the current asset section that the balance of cash and cash equivalence at the end of 2024 year is $344,000. It further shows that the balance of cash and cash equivalences at the end of the 2025 year is $198,200. These same two numbers appear on the last line of the cashflow statement. 

Put another way. The statement of cashflow explains how we got from last year's cash balance to this year's cash balance. 

The cashflow statement we have been reviewing is a look back analysis of the cash flows that have happened during the period. Your management accounts should also contain a look forward view of cash by preparing a cashflow forecast. 

A cashflow forecast is an essential tool for the directors and management to consider the ability of their organisation to stay solvent. That is the organisation can pay its obligations as and when they are due for payment. We will talk more about cashflow forecasting in later parts in this series. 

To summarise the key learnings from this part of the series. First, a cashflow statement shows the inflows and outflows of cash in an organisation during a period. It shows where the cash came from and how it was spent, and plays a critical role in helping directors to understand whether their organisation can generate enough cash to fund its activities and stay solvent. 

Second, all of the cash inflows and outflows are grouped in one of three categories. Cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Cash from operating activities are all the flows relating to the day-to-day activities of the organisation. The net of all operating cash flows is a net cash surplus or deficit for the period. Cash flows from investing activities shows cash used or received from buying or selling non-current assets, such as property. Cash flow from financing activities, shows cash flows relating to the funding of the organisation. 

Finally, we discuss some of the things directors should consider when reviewing a cash flow statement. Part six of this series will further explore how directors can read and interpret the cash flow statement and what additional questions they should ask. 

Welcome to part six in this series. In this sixth part of the series, we will be focused on reviewing the financial statements and we'll be covering the following three areas. 

First, we will recap the purpose of each of the three primary financial statements, what they show and how together they give a complete picture of the financial position and performance of the organisation. Second, we'll review how a director should read and interpret the financial statements and some questions they may want to ask. Finally, we'll consider some helpful financial ratios or metrics that directors can use to further analyse the financial statements and trends over time. 

We'll be referring to example financial statements for a fictitious company, Creative Arts Limited, and you can download a copy from the link in the video description. It will be helpful for you to have a copy of it available as we go through this session. If you haven't already watched videos three, four, and five in this series, I'd recommend you watch those videos first before watching this one. 

We'll begin with a recap of the three primary financial statements. The income statement shows how an organisation performed over a time period such as the financial year. It shows the revenue and expenses and whether the organisation made a surplus or a deficit. The balance sheet shows the financial position of an organisation at a point in time, such as the end of the financial year. It shows the assets, liabilities, and equity. The cash flow statement shows the inflows and outflows of cash in an organisation during a time period. It shows where the cash received came from and how it was spent. 

Three statements are interlinked and together provide a complete picture of the financial position and performance of the organisation. Let's look at how these statements work together in practice. Every year, the surplus or deficit in the income statement is transferred to the balance sheet and added to all previous surpluses and deficits to give the accumulated surplus or deficit number in the equity section of the balance sheet. 

In Creative Arts Limited's income statement, it made a surplus of $28,800 in the 2025 financial year. Now, taking a look at the balance sheet, the accumulated surplus at the end of 2024 was $325,300. Adding the 2025 surplus to this number gives the accumulated surplus at the end of 2025 of $354,100. 

The cashflow statement explains how the cash balance has moved over the period. Again, referring to Creative Arts Limited's balance sheet, the balance of cash at the end of 2024 is $344,000, and the balance at the end of 2025 is $198,200. These numbers correspond to the cash balances on the last line of the cashflow statement. To put it simply, the 2025 column in the cash flow statement explains the movement in the cash balance from 2024's balance to 2025's balance. 

We'll now turn to considering how we as directors should read and interpret the financial statements, individually and collectively. When reviewing financial statements, it is also very helpful to look for changes and trends over multiple periods or years. We'll start with the income statement and take you through a step-by-step process for reviewing it. 

Step one, review the different types of revenue. For example, ticket sales, grants, sponsorships, donations, or investment income. Then compare the actual revenue with the budgeted amounts. Do you understand the reasons for any large differences? The budgeted amounts will be found in the management accounts. Next, consider how diverse the revenue base is. Is there a risk that the organisation is too dependent on one type of revenue? For example, a grant, a donor, or an event, Creative Arts Limited has reasonable spread of revenue sources with $416,800 from performance revenue. In other words, ticket sales, and this represents 35% of total revenue. 32% of revenue is from fundraising and sponsorships, and 30% is from government grants. 

Step two, review the categories of expenses. Compare the actual expenses with the budget amounts, which are shown in the management accounts. Again, do you understand the reasons for any large differences? Then consider the types of expenditure is where the money is being spent aligned to the purpose and priorities of the organisation. Creative Arts Limited has a total expenses of $1,157,000, of which $600,800 or 52% is employee wages. 

Step three, did the organisation make a surplus or a deficit for the period? What has been the trend in surpluses or deficits over the past, say, five years? Creative Arts Limited's surplus has increased from $6,300 in 2024 to $28,800 in 2025. 

Next, we'll go through a step-by-step process for reviewing the balance sheet. Step one, are the assets of the organisation greater than the liabilities? In other words, does it have positive net assets or positive equity? Referring to Creative Arts Limited total assets of $842,700 less total liabilities of $472,200 gives net assets or total equity of $370,500. 

Step two, are current assets greater than current liabilities? Current assets or assets that are expected to be used or converted into cash in the next 12 months? Current liabilities are liabilities that are due to be paid in the next 12 months. You typically want current assets to be higher than current liabilities. Comparing the two is a helpful indicator of the organisation's ability to pay its liabilities when they're due. 

Total current assets of Creative Arts Limited are $239,400, which is actually lower than total current liabilities of $260,700. However, you can see that current liabilities includes revenues received in advance of $178,700, which is common in the balance sheet of many arts and cultural organisations. Creative Arts Limited has advanced ticket sales and government grants received in advance. 

Assuming the future performances are delivered and the activities required under the government grants are achieved, this money will be transferred and recognised as revenue as a consequence. It would be appropriate to ignore these liabilities when doing our comparison. For Creative Arts Limited, total current assets of $239,400 is higher than total current liabilities of $82,000 when we exclude the liabilities of advance ticket sales and grants received in advance. 

Step three, what is the level of net assets or equity, sometimes also called net reserves? Is there a sufficient financial buffer to cover future downturns in funding or to allow your organisation to take artistic risks? It is important that directors actively consider and agree a target level or target range of net reserves that their organisation should have. Their organisation should aim to build reserves over time to achieve or exceed this target. 

As a director of Creative Arts Limited, I'd be asking if core funding stopped tomorrow, how long could we continue to operate? A helpful benchmark for arts organisations is that unrestricted reserves should be at least 20% of annual expenses. For Creative Arts limited, this would be 20% of the total expenses of $1,157,000 or at least $231,400 in unrestricted reserves. 

However, if certain assets such as artworks or musical instruments are not easily convertible to cash, the directors may consider it necessary to set a higher target range. When calculating this ratio, restricted reserves are excluded as their use is restricted to a specific purpose. They're typically not available to use for general operating expenses. 

Turning now to the review of the cash flow statement. Step one, is the cash flow from operating activities positive? That is to say, is the revenue received in cash more than what is needed for day-to-day operating expenses? For Creative Arts Limited, net cash flow provided by operating activities was a positive $156,600. 

Step two, consider the cash flows from investing activities, that is the money spent on acquiring non-current assets. What assets is the organisation buying? Is it aligned to the organisation's purpose and priorities? Can this expenditure be funded sustainably? Creative Arts Limited spent $275,100 in the year on acquiring property, plant and equipment and financial investments. 

Step three, consider the closing cash balance and the movement during the period. Has the cash balance increased or decreased? Do we have enough cash on hand to pay employees, artists, and suppliers on time? Don't forget to consider timing differences between when income is received and when expenses are due to be paid. 

In the case of Creative Arts Limited, the balance of cash has reduced during the 2025 financial year by $145,800 to give a balance at the end of the year of $198,200. However, the value of financial investments has increased from $105,800 in 2024 to 374,500 in 2025, and these investments are likely also available to use to pay suppliers and employees, should this be required. 

Well now look at four helpful financial ratios you may want to consider calculating and tracking. A financial ratio is simply a way to compare two numbers in the financial statements and they assist you to spot trends quickly. For example, is a particular ratio better or worse this year than last. 

First operating margin, which is calculated as a net surplus divided by total revenue. In other words, what percentage of revenue is retained as a surplus after all expenses are accounted for? It's helpful to track this percentage over time to see whether the operations are becoming more or less efficient. Creative Arts Limited has operating margin of 0.6% in 2024, which improved a 2.4% in 2025. 

Second is revenue concentration. This is the largest revenue source divided by total revenue. As a general guide, if this number is greater than 40%, it may indicate that the organisation is overly reliant on one source of revenue, which may be a financial risk. In the case of Creative Arts Limited, the largest revenue source is performance revenue. That is revenue from ticket sales of $416,800, which is 35% of total revenue. 

Thirdly, artistic program expenses versus administration expenses. This is calculated as artistic program expenses divided by total expenses. For Creative Arts Limited, this ratio would be calculated based on detailed information provided in the management accounts. It may indicate that a disproportionate amount of money is being spent on administration of the organisation versus the artistic productions, and this may be misaligned with the expectations of stakeholders such as donors, government funders, or sponsors. 

Finally, fundraising efficiency expressed as a fundraising expenses divided by fundraising revenue, and again, as the name applies, it gives a guide as to the efficiency of fundraising activities. For Creative Arts Limited, this ratio would also be calculated based on detailed information provided in the management accounts. 

To summarise the key learnings from this part of the series, first we reviewed the purpose of each of the primary financial statements, what they tell you and how they're related. Second, we explained some step-by-step methods for reviewing the financial statements and examples of questions directors should ask to understand the financial position of their organisation. Finally, we provided some helpful additional financial ratios that directors can also use as an aid to tracking organisational financial performance over time. 

Welcome to part seven in this series. In this seventh part of the series, we'll be focused on internal financial reporting to the board.

First, we will recap the importance of transparency, accountability, and compliance in board financial reporting. Secondly, we'll consider best practise in financial reporting to the board. Finally, we'll look at the purpose of a budget and the considerations the board should have when reviewing and approving the budget.

In part one of this series, we learned that the directors have a key responsibility to establish a culture within the organisation of transparency, accountability, and compliance. This is particularly true when it comes to financial reporting to the board.

The ACNC act imposes various duties on directors who the ACNC refer to as "responsible people". These duties include the duty to act with reasonable care and diligence, the duty to ensure the financial affairs of the organisation are managed responsibly and the duty to not allow the organisation to operate while it is insolvent.

Directors should set the tone from the top and consistently emphasise the importance of sound financial stewardship. As a director, we should establish a no surprises expectation with the CEO, the finance manager and the wider management team. Every significant strategic or operational decision by both the board and management should be made with the consideration of the financial implications.

Financial reporting to the board is ordinarily done through the provision of management accounts, accompanied by reports from the CEO or finance manager. The board should set clear expectations of management about the form and content of these reports.

The management accounts provided to the board should be calculated in accordance with Australian accounting standards, including the recognition and valuation of revenues, expenses, assets, and liabilities.

In this way, there will be consistency in the reporting of the financial position and performance between the internal management accounts, produced throughout the year, and the external financial statements, which are produced at the end of the year.

However, the board has the complete flexibility to determine the format and level of detail received in management accounts. It is important for directors to be mindful that your role is governance and oversight, not day-to-day management. You should avoid moving too far into operational detail and overstepping your role.

Management accounts should be prepared in line with the board meeting calendar and circulated to the directors in advance of board meetings. They can also be prepared monthly, quarterly, or on an ad hoc basis, if required.

Best practise for management accounts and the accompanying CEO or finance manager's report, would include the following: An income statement shown the results for the month or quarter and year to date. These should be compared to the budget for the same period and the actual results in the equivalent period in the year before.

The CEO or finance manager should provide an explanation of any significant variances between the actual results and the budget. A balance sheet at the end of the period and a statement of cash flows covering the period should also be provided.

In addition to these look-back statements, best practise board financial reporting would also include some key look forward reports, including a full year forecast for the income statement and a cashflow forecast for the next 12 months.

The accompanying commentary from the CEO or the finance manager should give further insight into the operating and financial performance of the organisation. This would include how the financial resources are being used to achieve the organization's objectives, including the financial impact of any strategic initiatives, for example, new artistic programs or fundraising campaigns.

It should also include a discussion on key financial risks. For example, reliance on one source of funding or donor concentration. These should also be linked to the organization's risk register. If the organisation has a board approved strategic plan, the reporting could include a dashboard for tracking key performance indicators and financial ratios.

We now turn to budgeting. In an arts and cultural organisation, the annual budget is key to ensuring the organisation can deliver its creative mission sustainably, responsibly, and transparently, while also building and protecting its long-term financial viability.

The budget serves many purposes. First, it shows how the organisation intends to deliver its artistic plans and the allocation of resources needed to achieve them. Second, it helps to ensure the financial impacts of artistic decisions are understood upfront.

Third, it assists in planning for the right mix of income sources such as ticket sales, grants, sponsorships, et cetera. Finally, it also allows the board and management to understand fixed versus variable costs, seasonal spending cycles, and cash requirements.

All of this provides support for about what is viable or what might need to be deferred. It also encourages transparency in the trade-offs between creative priorities and financial constraints.

In addition, a budget demonstrates accountability to key stakeholders such as government funding bodies, that their public funds will be used responsibly and for the intended purpose. The budget also allows directors to monitor actual performance against the plan, which supports the board's duties to ensure responsible financial and risk management.

The board and management should agree on a budget process and timetable well before the new financial year. The budget should be circulated to the board in advance to the board meeting at which it will be considered and approved. As a director, you should ensure you have allocated the appropriate time to review the budget.

When reviewing the budget, directors should consider the following things. Does it reflect the expectations of key stakeholders, the purpose of the organisation and the agreed priorities. Are forecasts of the various types of revenue, realistic and evidence based? Is there an overreliance on a single funding source, particularly if that source is insecure?

Are expenses explained and sustainable? Is the allocation of funds between the delivery of the artistic program, administration and fundraising costs appropriately balanced? Does the cashflow forecast show that the organisation will have enough cash to pay its liabilities when due?

Has the management team stress tested the key assumptions? For example, audience numbers? Have management planned for different scenarios, if the underlying assumptions change? Are there adequate unrestricted reserves to cover risks and unforeseen disruptions? Are there clear financial and non-financial measures to monitor spend against the budget throughout the year?

To summarise the key learnings from this part of the series, first we highlighted the importance of transparency, accountability, and compliance in board financial reporting. Second, we considered what best practise in board financial reporting looks like. Finally, we understood the purpose of the budget and the considerations the board should have when reviewing and approving the budget.

Welcome to part eight in this series. In this eighth part of the series, we will be focused on external reporting obligations. 

First, we'll review the financial reporting obligations the organisation has to the ACNC and other external stakeholders. Second, we'll discuss what directors are confirming in the responsible persons' declaration, which is part of the financial reporting to the ACNC, including the question the directors should ask before agreeing to sign the declaration. Finally, we'll discuss the purpose of an external audit and the types of audit opinions that may be provided. 

To begin, directors need to be aware of all of the external reporting obligations that the organisation has, including the processes in place to ensure compliance. Organisations registered with the ACNC must report annually to the ACNC. In addition, under the terms of funding agreements, organisations will likely have reporting obligations to government funding agencies such as Creative Australia or state or local government authorities and private foundations or donors. These obligations may extend beyond financial statements and include other metrics such as box office receipts, audience numbers, or artist engagement. 

Let's take a closer look at the important annual reporting obligations to the ACNC. First, all organisations registered with the ACNC must lodge an annual information statement or AIS, annually. The AIS includes basic financial information such as revenue and assets, and other operational details, such as a description of the organisation's activities and governance arrangements. The standard reporting period is the financial year, 1 July to 30 June, unless the organisation has obtained approval to lodge for a different period. The AIS must be lodged within six months of the end of the reporting period. 

In addition to the AIS, organisations that are classified as medium or large organisations by the ACNC, must also lodge an annual financial report or AFR. Small organisations are exempt from this requirement. The revenue of the organisation determines whether it is classified as small, medium, or large. At the time of recording, organisations with revenue under half a million dollars are small. Those with revenue between $500,000 and 3 million are medium, and those with revenue greater than 3 million are large. Check the ACNC guidelines for the current revenue thresholds. 

Like the AIS, the AFR must be lodged within six months after the end of the reporting period, and must include the following. First, the three primary financial statements being the statement of profit or loss and other comprehensive income, the statement of financial position, and the statement of cash flows. We have discussed these in other parts of this series. Second, a statement of changes in equity. We have not discussed this statement, but it simply explains the changes in equity section of the balance sheet during the year. Third explanatory notes to the financial statements, which outline the basis on which the accounts have been prepared and the key accounting policies used. Finally, a responsible persons' declaration. 

This is a critical declaration that every director is jointly responsible for authorising the signing of. In this declaration, the directors are confirming a few key matters. First, that the financial statements have been prepared in accordance with the requirements of the ACNC Act, including complying with Australian accounting standards. Second, that they give a true and fair view of the organisation's financial position and performance for the year. Third, that there are reasonable grounds to believe that the organisation will be able to pay its debts as and when they become due and payable. This is known as the solvency declaration. 

Authorising the signing of the responsible persons' declaration is one of the most important duties of a director. While the board may elect to delegate to a board subcommittee, such as the Audit and Risk Committee, the duty to perform a detailed review of the financial statements, ultimately, every single director is jointly responsible for making the declaration. Therefore, it's critical that every director engages in the process to review and approve the AFR. You cannot leave it to the accountants of the board, the members of the Audit and Risk Committee, or indeed the external auditor. 

To assist you with this process we'll now review some questions a director should ask of management or matters they should consider before agreeing to sign the declaration. Has the AFR been prepared in accordance with ACNC requirements and the Australian Accounting Standards? As a director, do I understand and support the major estimates and judgements that management have made in preparing the financial report? 

With regards to the solvency declaration, have management prepared a cashflow forecast that shows that the organisation will have enough cash to pay its debts as and when they fall due over the next 12 months. If the cashflow forecast includes assumptions about receipts from sponsorships, donations, or government grants, have these been secured in written agreements? If not, is there a reasonable basis to believe that the funds will be provided? 

You should also ask management to confirm that all obligations with respect to taxes, employee superannuation, ACNC lodgements, grant acquittals are up to date. Finally, the director should discuss the draft financial statements with the auditor, to learn if any issues or concerns have been raised during the audit. 

When the AFR is lodged with the ACNC, it must be accompanied by a report from an external auditor. So what is an external audit and what is its purpose? The purpose of an external audit is to give an independent opinion as to whether the financial statements have been prepared in accordance with the requirements of the ACNC Act, including complying with Australian accounting standards and give a true and fair view of the organisation's financial position and performance for the year. The directors confirm this when they sign the Responsible Persons' Declaration. 

An external audit provides an independent opinion on these matters for the members or shareholders of the organisation. It is important to note that the directors sign the responsible persons' declaration before the auditor signs their audit opinion. This is done deliberately to ensure that directors take prime responsibility for the financial statements. The interests of directors and the auditor are aligned, but you cannot just rely on the opinion of the auditor. You must make whatever inquiries are necessary to form your own view. 

Under ACNC rules, the AFR for large organisations must be audited, and for medium organisations, it must either be audited or reviewed by an auditor. What is the difference between an audit and an audit review? An audit provides reasonable assurance that the financial statements are free from material misstatement. The auditor will provide a positive opinion regarding this. For example, in our opinion, the financial statements give a true and fair view. An audit review, on the other hand, provides lower level of limited assurance. The report from the auditor will provide a negative opinion. For example, based on our review, we are not aware of any material misstatements. 

Due to their limited scope, audit reviews are generally faster and lower cost than a full audit. However, directors of medium sized organisations should also consider the requirements or expectations of other stakeholders, such as government funding bodies or grant providers, when deciding whether to have an audit or audit review performed. 

With an audit, different types of opinions may be given by the auditor. An unmodified opinion otherwise known as an unqualified or clean opinion is the best outcome. The auditor is confirming that the financial statements give a true and fair view in all material respects. 

When the audit opinion is qualified, this means that the auditor has identified a specific issue that is material, but only affects us part, and not all, of the financial statements. This typically occurs when there has been a departure from an accounting standard or where the auditor cannot get sufficient evidence in a particular area. 

An adverse audit opinion is very serious, as it means that in the opinion of the auditor, the financial statements do not give a true and fair view, and therefore are fundamentally unreliable. A disclaimer of opinion is also very serious and occurs when the auditor cannot provide any opinion. This may occur if the financial records are missing or incomplete or the auditor has been restricted from accessing the records, or where significant uncertainty exists that cannot be resolved. 

As part of their audit procedures, an auditor will test the adequacy and effectiveness of the organisation's financial and technology internal controls. The auditor will report their findings to management and the directors. 

To summarise the key learnings from this part of the series. First we reviewed the financial reporting obligations the organisation has to the ACNC and other external stakeholders. Second, we explored what the directors are confirming in the responsible persons' declaration and questions or matters a director should consider before agreeing to approve the signing of the declaration. Finally, we learned the purpose of an external audit and the types of audit opinions that may be provided. 

Welcome to part nine in this series. In this ninth part of the series, we'll be focused on the audit and risk committee. 

First, we'll discuss why boards use committees, in particular the Audit and Risk Committee. Second, we'll discuss the composition of the committee, the purpose of the committee charter, and the relationship between the committee and the full board. Finally, we'll discuss the key areas of oversight the audit and risk committee undertakes, including external financial reporting, the external audit, risk management, and internal controls. 

Let's begin by exploring why boards use committees. Committees also sometimes called subcommittees assist boards to carry out their responsibilities more effectively and efficiently. In practise, boards may not be able to do all the detailed oversight work in full board meetings, so committees are used to take on focused areas of oversight and report the results back to the full board. 

However, it is important to emphasise the committees do not replace the board. Rather, they support the board. The full board remains accountable for all decisions and oversight. Some smaller organisations may not have any board committees, and the full board would undertake the work discussed in this video. 

Audit and risk committees are commonly used by boards to support oversight on financial matters. The committee may be called by other names, including a finance committee or a finance audit and risk committee, or similar. The scope of the committee's responsibilities should be clearly set out in a committee charter, or terms of reference. 

For an audit and risk committee, it is best practise if the members of the committee are all independent non-executive directors. That is directors who are not part of executive management of the organisation. Additionally, the chair of the committee should not also be the chair of the board. 

It is best practise that at least one of the members has strong financial expertise, typically an accountant or similar. Also, the CEO, Finance manager, other relevant members of the management team and the external auditors should be invited to committee meetings. Directors of the board who are not formally members of the committee can attend committee meetings should they choose. 

The full board should have access to the committee papers and be provided with the minutes from the committee meetings. The chair of the audit and risk committee should provide a full report to the board after each committee meeting to update them on the work performed and any recommendations from the committee to the board. 

As mentioned, the areas of oversight undertaken by the audit and risk committee should be set out in the committee charter or terms of reference. As a minimum, they usually include oversight of four key areas, external financial reporting, the external audit, risk management, and internal controls. Let's consider each of these areas in turn. 

As we discussed in part eight, a key responsibility of the board is to authorise the signing of the responsible persons' declaration, in conjunction with the annual financial report or AFR. The committee can be given the responsibility to undertake a detailed review of the AFR to provide the full board with a recommendation as to whether they approve the signing of the declaration. 

As part of their oversight of the AFR, the committee would usually consider the following areas. First, they should assess the appropriateness of the accounting policies that management have used and the estimates and judgements management have made when preparing the financial statements. Management should provide the committee with the information they require to ensure these policies, estimates and judgements have been selected and made with transparency and integrity. 

One of the key judgements underpinning the financial statements is whether the organisation is, what is known as, a "going concern". A going concern means that the organisation is expected to continue to operate normally for at least the next 12 months after the date of signing the responsible persons' declaration. 

That is to say that the organisation is expected to continue its activities, pay its debts as they fall due, and is not planning or forced to wind up, liquidate, or significantly reduce operations. Whether or not an organisation is a "going concern" will have a significant impact on how assets and liabilities are valued. It's therefore a key judgement area the committee needs to consider. 

Second, the committee should make the necessary inquiries of management to ensure the financial statements have been prepared in accordance with Australian accounting standards and that they give a true and fair view of the financial position and performance of the organisation. Here, the committee should consider the integrity, clarity, and transparency of financial disclosures in the AFR. 

Third, the committee should consider the solvency of the organisation. Management should prepare a cashflow forecast that shows that the organisation will have enough cash to pay its debts as and when they fall due over the next 12 months. If the cashflow forecast includes assumptions about receipts from ticket sales, sponsorships, donations, or government grants, the committee should review these to ensure there is a reasonable basis for these assumptions. 

A secondary of oversight responsibilities for the committee, is regarding the external audit. In part eight of this series, we discussed the ACNC's requirements as to when an external audit is required. The audit and risk committee makes recommendations to the board regarding the appointment or replacement of the external auditor. 

The committee must also ensure that the auditor is independent. That is they are free from any influence, bias, or conflicts of interests. The auditor should present their audit plan to the committee, and the committee should review the performance of the auditor on an annual basis. 

Importantly, the committee should receive reports from the auditor and discuss with them their findings from the conduct of the audit. The auditor should also report to the committee on any weaknesses in internal controls that were identified and any recommendations for improvement. 

A good governance practise is for the committee members to meet with the auditor in-camera, that is without management present. This facilitates an open, candid discussion about issues the auditor may not be comfortable raising in front of management. 

In these meetings, the committee can gain insight about the organisation's culture, whether management provided full cooperation and access, if there were any disagreements about accounting judgements, and whether there are any emerging risks not yet visible in the financial reports. 

A third area of oversight responsibilities for the committee is regarding risk management. The full board is responsible for risk management, however, the audit and risk committee can support the board by ensuring the organisation has an effective risk management framework. 

That is an effective system for identifying, assessing, managing, and monitoring risks. The committee should also perform regular reviews of the risk register to ensure all material risks have been identified and are being effectively managed. A key way of mitigating risks is through insurance, and the committee should review the suitability of the insurances that the organisation has. 

The fourth area of the committee's oversight responsibilities is internal controls. While the full board remains responsible for ensuring the organisation has an effective system of internal controls, the audit and risk committee undertakes detailed oversight and monitoring of the controls to ensure they are adequate and effective. 

So what is an internal control? Internal controls are all of the policies and procedures that are necessary to ensure there is integrity in the financial reporting that all laws, regulations, contracts, and agreements are being complied with, that protect the assets of the organisation against fraud or misuse, and ensure effective risk management. 

Examples of internal controls include financial delegations or purchasing procedures. The board is responsible for ensuring these controls are in place. The management of the controls sits with management. 

To summarise the key learnings from this part of the series. First, we discussed why boards use committees, in particular at the audit and risk committee. Second, we discussed the composition of the committee, the purpose of the committee charter, and the relationship between the committee and the full board. Finally, we discussed the key areas of oversight, the audit and risk committee undertakes, including external financial reporting, the external audit, risk management, and internal controls. 

Welcome to part 10 in this series. In this 10th and final part of this series, we'll be focused on insolvency. 

First, we will explore what insolvency is and the key duties directors have to prevent insolvent trading. Second, we'll review the potential consequences for directors personally, if the organisation continues to operate while insolvent. Finally, we'll identify some potential warning signs of impending insolvency and when the directors may want to obtain immediate professional advice. 

Let's begin by explaining what is meant by insolvency. An organisation is insolvent if it is unable to pay its debts as and when they become due and payable. Directors need to know if the organisation has enough cash, that is readily accessible to pay debts when they are due. Directors have an essential legal duty to ensure that their organisation does not operate while insolvent. 

For organisations registered with the ACNC, governance standard number five states that responsible people must “ensure that the charity's financial affairs are managed responsibly and not to allow the charity to operate while insolvent.” 

For those organisations that operate as a company, for example, a company limited by guarantee, directors have further duties under the Corporations Act. The Corporations Act states that a director must prevent a company from incurring a debt or financial obligation if the company is insolvent, or by incurring the debt, becomes insolvent, and if there are reasonable grounds for suspecting that the company is insolvent or would become insolvent. 

These duties require that directors actively monitor solvency and liquidity. It's important to note that ignorance is not an automatic defence for a director. If another director acting reasonably in the same position would've suspected insolvency. 

If directors allow an organisation to continue to operate while insolvent, they potentially expose themselves personally to significant legal, financial, and reputational consequences. For organisations that operate as a company, the potential consequences for directors include being sued personally for any debt incurred when there are reasonable grounds suspecting that the company is insolvent as well as penalties or fines. 

The corporate regulator, the Australian Securities & Investments Commission, ASIC, may investigate and commence civil proceedings against the directors. In the most serious cases under the Corporations Act, if the director's failure to prevent insolvent trading was dishonest, it may result in a criminal liability, the penalty for which can include fines and or imprisonment. 

For an organisation registered with the ACNC, but which is not a company, for example, an incorporated association, the consequences may include investigation by the ACNC, removal from the ACNC register and reputational damage. Under the Director Penalty Regime, the Australian Taxation Office can hold directors personally liable for unpaid tax obligations, including pay as you go, PAYG, withholding tax goods and services tax, and unpaid employer superannuation contributions owed by the company. 

Beyond the legal liabilities, being associated with an organisation that traded while insolvent can seriously damage the professional reputation of the director. This can impact their ability to be appointed to or serve on other boards and their professional credibility in the arts and cultural sector. 

Let's now turn to some potential warning signs of impending insolvency. Directors should be alert to both financial and non-financial indicators. Depending on the particular circumstances of your organisation, one or more of the warning signs we discuss here may not mean that your organisation is currently insolvent, however, they are signposts, which indicate that the directors may need to give increased focus to the organisation's solvency and liquidity. 

Common warning signs include: The organisation is operating with persistent net deficits or losses, that is expenses are greater than revenue over several years. The organisation has negative cash flow from operations, that is payments to employees, artists, and suppliers regularly exceed the income received in cash. The cash balances and net reserves are declining over several years. 

That there has been a significant decline in ticket sales without any corresponding expense reductions. There is declining support from the audience, members, donors, corporate sponsors, or government funding agencies. There is an over-reliance on one major source of funding. For example, a single corporate sponsor. 

The organisation has difficulty paying bills on time or is repeatedly asking suppliers for extensions of time to pay. Their suppliers are withdrawing credit or a threatening legal action against the organisation to recover unpaid money. The organisation is relying on short-term borrowings, such as loans from directors to fund day-to-day expenses. 

There's a reliance on grants, sponsorships or donations it hopes to get but that are not yet secured to fund ongoing operating costs. There are delays in paying staff or artists wages, superannuation, or other entitlements. That business activity statements are being lodged late and the payment of PAYG and GST obligations is delayed and that there are unexplained budget variances or poor financial reporting to the board. 

Other warning signs may include the artistic programme spending continues unchanged despite increasing financial stress. There is turnover in the CEO or other leadership positions, board instability or governance conflict. The organisation has difficulty in attracting or retaining staff, or there is staff and artist unrest or burnout, and that the organisation lacks a clear strategic and financial sustainability plan. 

A warning say may also come from discussions with the auditor or from their audit opinion. On occasions, the auditor will include in their opinion what is known as an emphasis of matter relating to the going concern. This is used when the auditor believes there is significant uncertainty about the organisation's ability to continue operating for at least 12 months, but it has been appropriately disclosed in the financial statements, and the auditor can still issue an unmodified or clean audit opinion. 

It's used when the financial statements are not incorrect, but the situation is serious enough that the auditor draws special attention to it. In part six of this series, we discussed how directors should read and interpret the financial statements of the organisation, in particular, how to look for warning signs regarding financial sustainability. 

If directors suspect that their organisation is insolvent or is approaching the point of insolvency, they should immediately seek legal and specialist insolvency practitioner advice. 

To summarise the key learnings from this part of the series, first we discuss what is insolvency and the key duty directors have to prevent insolvent trading. Second, we discuss the potential consequences for directors personally if the organisation continues to operate while insolvent. Finally, we identified some potential warning signs of impending insolvency and when the directors may want to obtain immediate professional advice. This is the final video in this series, and we hope that these resources have assisted you to understand your fiduciary responsibilities with respect to the financial management of the organisation, and have further assisted you to improve your skills in reading and interpreting the financial information you receive. Additional resources can be found in the link in the description of this video.