Chapter 5: Financial decision-making

Governance is important in financial decisions

What an organisation spends its money on and how it safekeeps its resources help demonstrate its values and priorities and give a clear indication of what is important to it.

Officers are entrusted with guiding their organisations and a variety of financial decisions. 

No matter the size of the transaction, there are standards of conduct expected of officers who make financial decisions. If you are an officer of an organisation, you must ensure that decisions involving your organisation’s finances, whether made individually or collectively, are in accordance with your organisation’s rules and the Fair Work (Registered Organisations) Act 2009 (the RO Act). 

Useful tip: Officers are only human

Organisations can use governance processes to provide support, guidance, oversight, and clear expectations. Officers are not infallible, and by putting systems around them to encourage good governance it reduces the risks associated with misconduct, incorrectly spent money and mistakes.

Putting systems and oversight in place around financial decision making should reduce: 

• poor decisions caused by being distracted, busy, ill-prepared or having a lack of expertise
• misconduct going undetected, or perhaps even being attempted.

Expenditure policies

The RO Act requires that organisations and their branches develop and implement expenditure policies, including policies governing the proper use of credit cards. Expenditure policies are essential for good financial management in organisations and should set a clear framework for officers and employees to follow. They also provide critical oversight processes.

It is best practice to have multiple financial policies, as different items of expenditure can require different practices and approvals. 

What should I consider when designing my expenditure policy?

First consider how you will break up different classes of spending as they should have different approvals. For example, a purchase of stationery may only require approval from a supervisor or manager, whereas signing a lease may require scrutiny and approval from the Committee of Management. 

Good governance requires policies to spell out when they apply, who and what they apply to. Any policy should make it very clear who has the power to approve expenditure. Make sure when you write your policies that you use generic titles, or office names, rather than specific people’s names (say president instead of Jane), so that they remain relevant over time.

Your policies should require adequate record keeping and reconciliation processes so that a finance officer, or a more senior officer, can verify that purchases have been incurred for work related purposes. 

Think through all possible options when designing your policies, for instance, officers should not be allowed to sign off on their own expenditure, even if they would ordinarily sign off on similar financial matters for everyone else. If an expense or financial decision has not been approved correctly this is a significant matter, regardless of how big the transaction was, and it must be taken seriously. 
 

Useful tip: Review and publicise your policies regularly

Policies should be regularly reviewed and updated to ensure they are fit for purpose and are being followed by staff and officers. Your organisation’s practices may gradually change over time, and this will ensure your expenditure policies evolve with your organisation. 

A policy should note how often it needs to be reviewed and who has the authority to approve the policy, such as the Committee of Management. 

I thought the policy meant X and someone else thinks it means Y?

This is something that the Commission often sees when conducting its investigations and even during litigation. Having multiple people involved in drafting or reviewing policies can help minimise this confusion.  

If you identify any unclear sections of your policies consider:

• including practical examples
• avoiding words like ‘reasonable’ or ‘appropriate’ as they can introduce discretion into how your officers use your policies (ideally you should review your policies to reduce discretion)
• use plain language
• use concrete amounts – for instance consider saying this policy is for expenses up to $500 instead of ‘small expenses’, or an officer can spend $40 for dinner, instead of ‘a reasonable amount’.

This is a great example of why a speak-up culture is important. You want officers, like Jordan in the example below, to ask questions and clarify concerns, rather than just guess what is expected.

How policies can influence expectations and spending

Jordan is travelling on behalf of the organisation for the first time. He has been given a corporate credit card and told to stay overnight somewhere. A travel expenditure policy was provided to him and a quick read shows that:

• Accommodation can cost a reasonable amount depending on the area
• Dinner can be put on the corporate credit card, as can drinks and breakfast the next day

Jordan has read every word of the policy and is quite confused as to how much can be spent. On returning to the organisation, his manager was upset to find out how much Jordan had spent on a few drinks, dinner at the hotel restaurant and room service for breakfast.  

The policy was then updated to read:

• ‘Accommodation must be arranged in advance – see table for max. costing per city’
• ‘officers can spend
  • $15 on breakfast
  • $20 on lunch
  • $35 on dinner (with another $15 on drinks – no alcohol)
• Officers cannot spend the organisation’s money on room service or minibar items.

Jordan now knows exactly how much he can spend next time he travels!

General Manager of Fair Work Australia v Health Services Union and Others

The Federal Court found that three senior officers breached their duty of care and diligence through a failure to follow appropriate financial procedures. 

These officers provided the organisation’s bank PIN numbers and pre-signed cheques to an office manager, who spent the organisation’s money without any further approval from the officers. This meant that there was no oversight of the money spent by the office manager. 

Although the officers argued that the conduct was honest and did not result in loss or damage to the organisation, the court still found that it was not appropriate for officers to ignore rules and procedures even if they were inconvenient.

Appropriate use of organisation credit cards

Many of the matters the Commission sees involve credit card use. Corporate credit cards are convenient but have additional risks. 

Good governance around credit cards is a combination of culture and policies. Organisations should put extra precautions and clear policies in place to ensure that:

• officers and employees use credit cards appropriately
• everyone is aware that misuse of a credit card by an officer or an employee may also breach the officers’ duties owed under the RO Act, (see chapter 6: Officers’ duties)
• credit cards can only be used for business purposes, and not for personal benefit
• expenses placed on credit cards are regulated and monitored
• receipts are routinely checked against credit cards
• limits are placed on how credit cards are used and for what amounts
• personal spending on credit cards is prohibited as well as requirements if any personal expenditure is incurred on the credit card, how the money must be repaid and explain the consequences that will arise if a person misuses their credit card.
   

Useful tip: Credit cards count as ‘financial affairs’

If a branch uses a credit card, it will probably not be eligible for a section 271 financial reporting exemption.

Useful tip: Reconcile your records monthly

For day-to-day transactions, it’s best practice to keep receipts and reconcile them monthly with credit card statements. Without receipts, there is no way for your organisation to know whether the purchase was made for a business purpose. 

This means a failure to keep receipts can be as serious as incorrect spending.

Expenditure policies should require officers and staff to record how they spend the organisations’ money and have an approval process for all purchases. 

Additionally, the policy should outline 

• who the receipts should be provided to 
• where they should be stored 
• how long the individual has to submit their claims and associated records. 

For your own peace of mind, you should keep appropriate records of your spending in case your expenditure is ever questioned. 

Making informed decisions

Financial decisions should be fully informed. Officers should ensure they have enough information and knowledge of the organisation’s financial reports, and the operations of the organisation or branch. It is not sufficient to rely on other officers or employees of the organisation to review reports, an officer must personally inform themselves of key information before making decisions. (See chapter 6: Officers’ duties for more information.) 

Undertaking financial training and proper induction also helps officers better understand their duties under the RO Act as well as helping to understand the financial decisions they will be making. Please refer to chapter 3: Officer induction.